SOCIAL 
SCIENCES 


> 


PRINCIPLES 
OF  MARKETING 


BY 

FRED  E.  CLARK,  PH.D. 

ASSOCIATE    PROFESSOR    OF    ECONOMICS    AND    MARKETING    IN    THE 
NORTHWESTERN    UNIVERSITY    SCHOOL   OF    COMMERCE 


Sotfc 

THE  MACMILLAN  COMPANY 
1922 

All  Rights  Reserved 


\ 


FEINTED  IN    THE   UNITED   STATES    OF  AMERICA 


SOCIAL 


COPYRIGHT,  1922, 
BY  THE  MACMILLAN  COMPANY. 


Set  up  and   electrotyped.     Published  September,  1922. 


PREFACE 

The  purpose  of  this  book  is  to  treat  of  the  nature  of  the 
marketing  process,  viewing  the  market  structure  as  a  whole 
and  analyzing  marketing  problems  and  the  devices  used  in 
solving  them.  In  doing  this  I  have  tried  to  discuss  the  most 
fundamental  of  the  problems  and  principles  involved.  De- 
scriptive material  has  been  used  when  it  seemed  essential  to 
the  illustration  of  principles,  and  economic  theory  has  been 
introduced  wherever  it  would  promote  the  discussion  of  partic- 
ular points. 

The  form  of  treatment  is  functional.  But  sufficient  infor- 
mational- material  has  been  introduced,  early  in  the  book,  to 
give  a  background  from  which  to  develop  the  functional 
approach.  With  this  in  view  the  first  two  chapters  discuss  the 
general  nature  of  marketing  and  introduce  the  marketing 
functions.  .Chapters  III-V  discuss  the  problems,  methods,  and 
machinery  used  in  marketing  farm  products.  Chapter  VI 
treats  of  the  marketing  of  raw  materials.  Since  many  of  the 
problems  found  in  marketing  raw  materials  are  similar  to 
those  involved  in  marketing  farm  products,  the  treatment  here 
is  from  the  buying  rather  more  than  from  the  selling  point  of 
view.  In  the  four  chapters  which  follow,  the  marketing  of 
manufactured  products  is  discussed.  Two  chapters  are  then 
devoted  to  retailing  and  one  to  cooperative  distribution. 
Chapter  XIV  serves  a  double  purpose.  In  it  is  discussed  the 
general  topic  of  the  elimination  of  middlemen,  and  at  the 
same  time  it  serves  indirectly  as  a  convenient  summary  of 
previous  chapters.  This  summarization  prepares  the  reader 
for  the  discussion  of  the  specific  functions  and  problems  which 
comprises  the  remainder  of  the  book. 

This  method  of  presentation  is  a  development  of  several 
years'  experience  in  teaching  marketing.  First  used  as  lecture 
notes,  these  chapters  have  been  revised  from  time  to  time  and 

v 

492140 


vi  PREFACE 


r 


for  the  past  four  years  have  been  used  in  mimeographed  form 
in  my  own  classes  and  by  instructors  in  a  few  other  large 
universities.  Because  the  conditions  under  which  marketing 
courses  are  given  in  colleges  and  universities  are  so  various 
that  no  one  form  of  presentation  is  likely  to  prove  adapted  to 
all  needs,  ample  cross  references  are  used  and  some  repetition 
is  indulged  in.  The  rather  copious  footnote  references  of  the 
earlier  mimeographed  editions  have  been  largely  retained. 
Such  specific  references  seem  to  serve  better  as  a  basis  for 
collateral  reading  and  class  reports,  and  as  a  source  for  lec- 
ture material,  than  do  more  general  bibliographies. 

The  names  of  the  business  men  and  of  others  who  have 
helped  me  from  time  to  time — in  conference,  and  by  letter, 
and  with  access  to  confidential  information  or  to  information 
not  in  published  form — are  too  numerous  to  give.  There  are, 
however,  a  few  to  whom  I  am  particularly  indebted.  All 
students  of  marketing  are  under  obligation  to  the  early 
analyses  of  market  problems  made  by  A.  W.  Shaw  in  his 
"Some  Problems  of  Market  Distribution"  and  by  L.  D.  H. 
Weld  in  his  article,  "Marketing  Functions  and  Mercantile 
Organization"  (American  Economic  Review,  June,  1917).  I 
am  personally  indebted  to  Mr.  Weld  for  constructive  criticism 
of  parts  of  my  manuscript.  I  wish,  also,  to  acknowledge  the 
help  of  several  others  who  have  rendered  special  assistance  of 
one  kind  or  another:  K.  W.  Colgrove,  R.  S.  Forsythe,  C.  E; 
Griffin,  C.  0.  Hardy,  0.  B.  Jesness,  E.  D.  Jones,  W.  E.  Lager- 
quist,  W.  H.  Moorhouse,  E.  G.  Nourse,  V.  H.  Pelz,  F.  A. 
Russell,  and  W.  K.  Smart.  My  colleague,  Professor  H.  B. 
Vanderblue,  read  the  entire  manuscript  in  its  earlier  stages  of 
development,  at  a  time  when  his  careful  criticism  was  most 
helpful.  My  greatest  indebtedness  is  to  my  wife,  Carrie  Pat- 
ton  Clark,  who  has  assisted  at  all  stages  in  the  preparation 
the  manuscript  and  in  getting  the  book  through  the  press. 

FRED  E.  CLARK. 
August  2,  1922. 


CONTENTS 

PAGES 

PREFACE v-vi 

CHAPTER  I       X 

INTRODUCTION • 1-9 

Marketing  defined,  1 ;  Different  group  interests,  1 ;  Con- 
centration and  dispersion,  2;  A  market,  3;  Channels  of  dis- 
tribution, 5;  Classes  of  middlemen,  5;  Classes  of  goods,  7. 

CHAPTER  II     / 

THE  MARKETING  FUNCTIONS .        10-28 

The  marketing  functions  named,  10;  Demand  creation, 
12;  Nature  of  demand  crea-tie*^  t3;  Modern  emphasis -of 
demand  creation,  14;  Role  of  demand  creation,  15;  Assem- 
bly, 16;  Assembly  by  manufacturers,  18;  Concentration 
and  dispersion  a  part  of  assembly,  19;  Transportation  and 
storage,  19;  Financing,  22;  Risk-taking,  23;  Standardiza- * 
tion,  23;  Bases  of  sale,  24;  Nature  of  standardization,  26; 
Grading,  27;  Summary,  27. 

CHAPTER  III    • 

MARKETING  FARM  PRODUCTS 29-54 

Characteristics  of  agriculture,  29;  Variation  in  methods 
of  marketing  farm  products,  30;  Problems  involved,  32; 
The  Farmer  and  marketing,  36;  Demand  creation  and  the 
agricultural  market,  38;  Concentration  and  dispersion  of 
farm  products,  39;  Methods  of  sale  vary,  43;  Direct  sale: 
grower  to  consumer  or  manufacturer,  43 ;  Sale  to  local  mid- 
dlemen, 46;  Sale  to  middlemen  in  outside  markets,  54. 

CHAPTER  IV 

THE  WHOLESALING  OF  FARM  PRODUCTS 55-73 

Establishing  business  connections,  55 ;  Facilities  of  whole- 
sale markets,  55;  Distribution  from  central  markets,  56; 
Classes  of  markets,  58;  Functions  of  wholesale  markets,  „ 

62;  Central  markets,  62;  Dispersion  from  central  markets, 
65;  Primary  markets,  66;  Seaboard  markets,  67;  Cotton 
and  wool  markets,  67 ;  Exchanges  and  auction  companies, 
68;  Jobbing  markets,  69;  Both  jobbing  and  central  markets 
in  some  cities,  70;  The  retail  market,  71;  Summary,  72. 


viii  CONTENTS 

\k 

CHAPTER  V 

PAGES 

MIDDLEMEN  OF  THE  AGRICULTURAL  WHOLESALE  MARKET  .     .     .        73-89 

Confused  nomenclature,  74;  Operations  of  wholesale 
middlemen,  74;  Specialization  by  products,  77;  Business 
relations  of  wholesale  middlemen,  77;  Commission  deal- 
ing,  78;  Outright  purchase,  78;  Rise  of  outright  purchase 
from  commission  dealing,  81 ;  Both  business  relations  pre- 
vail in  some  lines,  83;  The  wholesale  receiver,  84;  The 
broker,  85;  The  jobber,  86;  The  auction  company,  87; 
Middlemen  who  speculate,  88;  Functional  specialists,  88. 

CHAPTER  VI 

MARKETING  RAW  MATERIALS 90-110 

Small  scale  production  of  raw  materials,  90;  Transporta- 
tion problem,  91;  Need  for  standardized  materials,  93; 
Inspection  and  grading,  95;  Concentration  of  raw  mate-  . 

rials,  96;  Importance  of  middlemen,  97;  Need  for  continu-       ~~    / 
ous  and  assured  supply,  99;  Methods  of  assuring  a  supply,  / 

99;  Dependence  on  current  supplies,  99;  Contracts  for 
future  delivery,  101;  Purchase  of  a  season's  supply,  102; 
Control  of  sources,  106;  Summary,  109. 

CHAPTER  VII 

MARKETING  MANUFACTURED  PRODUCTS 111-132 

Control  of  quality  and  quantity,  111;  Faith  in  the  pro- 
»-  ducer,  111;  Large  scale  production  and  tendency  to  over- 
.     production,  112;  Need  for  demand  creation,  113;  Changing 
conditions,  114;  Integration,  115;  Wholesale  markets,  115; 
Central  wholesale  markets,  117;  The  sale  of  manufactures, 
119;  Classes  of  manufactures,  120;  Production  for  the, mar-         L 
ket,  124;  Selling  consumption  goods,  124;  Division  of  mar- 
ket work,  125;  Channels  of  distribution,  126;  Combination 
of  channels,  131. 

CHAPTER  VIII 

WHOLESALE    MIDDLEMEN    OF   THE    MANUFACTURER'S    MARKET: 
THE  JOBBER 133-152 

The  jobber,  133;  The  jobber's  service  to  the  retailer,  134; 
The  jobber's  service  to  the  manufacturer,  137;  Going 
"around"  the  jobber,  140;  Jobbing  lowers  costs,  141;  Job- 
bers "eliminate"  manufacturers,  141;  Private  brands,  142; 
Integration,  146;  Jobber  types,  146. 

CHAPTER  IX 

WHOELSALE  MIDDLEMEN  OF  THE  MANUFACTURER'S  MARKET  (con- 
tinued)           153-168 

Commission  house,  155;  Elimination  and  integration, 
156;  Manufacturer's  sales  agent,  157;  The  broker,  159; 


CONTENTS  ix 

PAGES 


Summary,  160;  Buying  middlemen,  161;  The  merchant- 
converter,  162;  Some  highly  specialized  functional  agen- 
cies, 163;  Middlemen  of  foreign  trade:  The  Commis- 
sion house,  164;  The  export  merchant,  166;  Manufacturer's 
agent,  167;  Cooperation  in  export  trade,  168. 


CHAPTER  _X_ 

DIRECT  MARKETING  OF  MANUFACTURED  PRODUCTS       ....     169-184 

Tendency  toward  direct  marketing,  169;  Jobber  losing 
ground,  170;  Jobbers  and  demand  creation,  173;  Products 
the  jobber  sells  best,  174;  The  jobber  and  new  products, 
175;  Jobber  brands,  175;  The  manufacturer  who  does  not«i. 
brand,  ,175;   Cost  the  determining  factor,  177;   Manufac- 
turers must  duplicate  service  of  jobber,  180;  Advertising  * 
and  direct  marketing,  181. 


CHAPTER  XI 

RETAIL   DISTRIBUTION 185-207 

The  retail  service,  185;  Types  of  retail  establishment, 
186;  The  country  general  store,  186;  The  unit  store,  187; 
Technical  aspects  of  retail  development,  190;  Manufac- 
turing progress  and  retailing,  191;  Buying,  193;  Selling 
assistance  from  manufacturers  and  jobbers,  194;  Tendency 
toward  better  service,  195;  Advertising  and  the  retailer, 
195;  New  problems,  196;  Widespread  inefficiency,  197; 
Retail  methods  and  policies,  198;  Elaboration  of  service, 
198;  Other  policies,  199;  Retail  brands,  200;  Stock-turn, 
201 ;  Stock-turn  and  prices,  203 ;  Buying  and  sales  effort, 
204;  Further  consideration  of  stock-turn,  204;  Advertising 
and  departmentization,  205. 


CHAPTER  XII 

LARGE  SCALE  RETAILING 208-237 

Advantages  of  large  scale  retailing  summarized,  208; 
Specialization  of  men  and  departments,  208;  Economy  in 
overhead  expense,  209;  Rapid  turnover,  210;  Special  ser- 
vices: adequate  stock,  211;  Buying  power,  212;  Integration, 
215;  Disadvantages,  216;  The  department  store,  218;  ad- 
vantages,  219;  High  expense,  220;  Personnel  problems, 
222;  The  large  mail  order  house,  223;  Its  rise,  225; 
Methods,  225;  Two  greatest  advantages,  226;  Systems, 
228;  Disadvantages,  228;  The  chain  store,  230;  Means  of 
control  and  ownership,  231 ;  Chain  store  vs.  specialty 
store,  232;  Peculiar  advantages,  233;  Turnover,  234;  Per- 
sonnel problem,  236;  Consolidation,  236;  Future  of  the 
chain  store,  237. 


x  CONTENTS 

CHAPTER  XIII  *S 

PAGES 

DISTRIBUTIVE  COOPERATION 238-270 

Cooperative  organization  vs.  independent  9rganization, 
239;  Agricultural  cooperation,  242;  Organization  features, 
243;  Largely  confined  to  local  markets,  244;  Purpose  of 
local  associations,  245;  Improved  grading  and  improved 
products,  247;  Federation  of  growers'  associations,  248; 
Extent  of  wholesale  activities,  249;  California  Fruit  Grow- 
ers' Exchange,  251;  The  Central  Exchange,  252;  United 
States  Grain  Growers  Incorporated,  254;  Costs,  256;  Com- 
bating specific  evils,  256;  Social  results,  257;  "Orderly 
marketing"  and  "stabilization"  of  price,  257;  Failures, 
258;  Results,  259;  Consumer  Cooperation,  260;  History 
of  the  English  movement,  260;  Cooperative  wholesaling, 
261 ;  Failures  and  successes,  261 ;  The  nature  of  consumer 
cooperation,  262;  Use  of  surplus  above  costs,  264;  Integra- 
tion, 265;  Economic  aspects,  265;  Some  selling  costs  cut 
down,  266;  The  "cooperative  spirit,"  267;  Weak  elements 
in  American  consumer  cooperation,  268. 


CHAPTER  XIV   u/ 

THE  ELIMINATION  OF  MIDDLEMEN 271-292 

Definition  and  limitation,  272;  Nature  of  criticism,  273; 
Who  can  eliminate  middlemen?,  274;  The  situation  in  the 
agricultural  market,  275;  Direct  buying  by  manufacturers, 
277;  Directing  marketing  of  manufactured  products,  278; 
The  arguments  for  elimination,  280;  Who  profits  from 
"elimination"?,  282;  The  importance  of  service,  283;  The 
problem  is  one  of  the  control  of  specialization,  283;  Spe- 
cialization and  integration,  284;  Industrial  conditions  affect 
market  integration,  285;  Conditions  which  make  integra- 
tion feasible,  286;  Importance  of  individual  characteristics, 
288;  "Profiteering,"  289;  Final  conclusions,  290;  Sum- 
mary, 292. 

CHAPTER  XV 

PHYSICAL    DISTRIBUTION 293-324 

Importance  of  transportation,  293;  Factors  determining 
efficiency,  295;  The  relation  of  transportation  to  market 
areas,  296;  Carload  rates,  297;  Carload  rates  and  jobbing, 
298;  Some  special  features  of  transportation  service,  300; 
Diversion  in  transit,  303;  Transportation  costs,  305;  Local 
trucking,  307;  Handling  products  at  terminals,  309;  Con- 
gestion in  terminal  markets,  312;  Storage,  313;  Causes  for 
storage,  314 ;  Two  kinds  of  storage,  315 ;  Nature  of  storage 
service,  315;  Care  of  merchandise.  316;  Place  of  Storage, 
317;  Finance  and  storage,  318;  Control  of  storage  facili- 
ties, 320;  Storage  and  prices,  322;  Cold  storage,  323. 


CONTENTS  xi 

CHAPTER  XVI 

^r  PAGES 

MARKET  FINANCE       . 325-349 

Causes  of  seasonal  needs,  327;  Conditions  determining 
current  financial  needs,  328;  Middlemen  and  finance,  333; 
Stock-turn  and  finance,  335;  Source  of  funds  and  means  of 
extending  credit,  336;  Types  of  credit,  336;  The  credit 
period,  338;  The  Security  for  credit,  339;  The  seller  and 
the  bank,  341;  Short  time  loans,  342;  The  cash  discount, 
342;  Cash  payment  and  the  bank,  345;  Particular  credit 
devices,  346;  Drafts,  348;  Commercial  paper,  348;  Cold 
storage  finance,  349. 


CHAPTER  XVII 

MARKET  RISK 350-379 

Time  risks,  350;  Place  risks,  351;  The  influence  of 
roundabout  production  on  risk,  352;  Risks  of  competition, 
353;  Other  risks,  354;  Some  methods  of  minimizing  risk, 
354;  Minimizing  market  risks,  355;  Minimizing  risk 
through  knowledge  of  the  market,  356;  Shifting  risk,  357; 
Contracts  shift  risk,  358;  Contracting  minimizes  total  risk, 
359;  Middlemen  and  market  risk,  360;  The  residual  risk, 
361 ;  Organized  dealing  in  "futures,"  361 ;  Shifting  risk 
through  hedging,  362;  Contracting  for  future  delivery, 
364;  Trade  and  speculative  profit,  365;  All  risk  is  not 
eliminated  by  hedging,  370 ;  Speculation,  372 ;  Effect  of 
speculation  on  prices,  374;  Evils  of  speculation,  375;  In- 
surance, 377;  Conclusion,  378. 

CHAPTER  XVIII     ^ 

MARKET   NEWS 380-395 

Importance  of  market  news,  380;  Problems  arising  from 
inadequate  news,  381;  Market  news  and  business  policies, 
382;  The  market  forecast,  382;  Interpretation  of  market 
news,  383;  Sources  of  market  news,  384;  Dissemination  of 
market  news,  385;  News  of  the  agricultural  market,  386; 
News  of  manufacturers'  markets,  387;  Open  price  associa- 
tions, 389;  Important  sources  of  foreign  trade  news,  390; 
News  of  general  commodities,  391 ;  General  market  condi- 
tions, 392;  Control  of  market  news,  392;  News  collected 
and  dispersed  by  the  government  and  by  associations,  394 ; 
Conclusion,  395. 


CHAPTER  XIX 

STANDARDIZATION .     396-407 

Standardization  makes  exchange  easier,  396;  Standardi- 
zation aids  physical  supply,  398;  Bases  for  standards,  398; 
Responsibility  for  the  observance  of  standards,  400; 
Standards  and  the  buyer,  401;  Mass  selling  methods  call 
for  standardization,  401 ;  The  container  and  standards, 
402;  Methods  of  standardization,  402;  Advertising  and 


Xll 


CONTENTS 


branding  standardized  goods,  403;  Not  all  standardized 
goods  sold  by  description,  403;  The  need  for  standards, 
404;  What  has  been  done?,  406. 


CHAPTER  XX 

COMPETITION  AND  PRICES 408-421 

Price  defined,  409;  Competitive  prices,  409;  Varying 
costs  of  production,  411;  Two  types  of  price,  413;  Funda- 
mental importance  of  demand  and  supply,  414;  Specula- 
tive prices,  415;  Monopoly,  416;  Consumer  desires  limit 

' —  monopoly,  417;  Determining  monopoly  price,  418;  Semi- 
monopoly  power  common  in  competitive  lines,  419;  Gov- 
ernment control  and  operation  of  monopoly,  420;  Custom- 
ary and  convenient  prices,  421. 


CHAPTER  XXI 


MARKET  PRICE 


Price  limits,  422 ;  Importance  of  retail  prices,  423 ;  Retail 
price  determination,  424;  The  "mark-up,"  424;  Customary 
and  convenient  prices,  426;  Price  estimating,  426;  Sug- 
gested prices,  426 ;  Price  understandings,  427 ;  Following 
competitors'  prices,  427;  How  prices  evolve,  429;  Prices  of 
production  goods,  430;  Prices  of  consumption  goods,  430; 
Prices  of  equipment,  431 ;  Consumer  demand  limits  prices, 
433;  Price  fluctuations,  434;  Prices  in  different  markets, 
435;  Retail  prices,  436;  Producers'  prices  and  wholesale 
market  prices,  438;  The  importance  of  the  wholesale 
price,  439;  The  Limits  to  market  areas,  440;  Is  market 
price  determinable  in  advance?,  443;  Prices  constantly  on 
trial,  445;  Increasing  demand  at  the  same  price,  445; 
Increased  demand  through  lower  prices,  446. 


422-446 


CHAPTER  XXII 

PRICE-MAINTENANCE  AND  UNFAIR  COMPETITION 

Price-maintenance,  447 ;  Some  remedies  for  price-cutting, 
447;  Emergence  of  the  price-maintenance  problem,  448; 
Price-maintenance  defined,  451 ;  legal  status,  451 ;  Argu- 
ments concerning  price-maintenance:  the  manufacturer, 
454;  The  manufacturer's  status,  456;  Price-maintenance 
and  the  middleman,  457;  Retail  monopoly  argument,  458; 
Price-maintenance  and  efficiency,  462 ;  The  manufacturer's 
dilemma,  463;  Unfair  competition,  466;  Competition  and 
economic  effectiveness,  466;  Unfair  methods  and  big  busi- 
ness, 466;  Unfair  price  practices,  467;  Other  price-cutting 
methods,  468;  Closing:  channels  of  distribution,  470;  Dis- 
honest and  questionable  practices,  471 ;  Unfair  competition 
and  the  public:  Conclusion,  472. 


447-472 


CONTENTS  xiii 

CHAPTER  XXIII 

PAGES 

THE  RELATION  OF  THE  STATE  TO  MARKETING 473-493 

Types  of  state  effort :  relative  importance,  473 ;  The  con- 
flict of  interests,  474 ;  Two  opposing  views  of  governmental 
regulation,  475;  Laissez  jaire,  476;  Extreme  interference, 
477;  Efforts  of  the  state  to  elevate  the  plane  of  competi- 
tion, 481;  The  efforts  of  associations,  482;  Mandatory  acts  » 
which  elevate  the  plane  of  competition,  484;  The  control 
of  monopoly,  487;  Efforts  to  make  distribution  more  ef- 
fective, 490. 

CHAPTER  XXIV 

THE  ELEMENTS  OF  MARKETING  EFFICIENCY      .     .     .     .     .     .     494-504 

"Private"  and  "public"  points  of  view,  494;  Components 
of  marketing  efficiency,  495;  Problems  of  technical  ef- 
ficiency, 496;  Effects  of  market  system  upon  production 
and  consumption,  497 ;  Criticism  of  the  competitive  regime, 
498;  Importance  of  service,  501;  The  determining  condi- 
tions of  modern  marketing,  502. 

^^ ^CHAPTER  XXV 

THE  Gp^^t5FMARKETiN£j    \ 505-519 

The  lack  oi~cost  data,  507;  Cost  of  marketing  farm 
products,  508;  Cost  of  marketing  manufactured  products:  *• 

Staple  lines,  511;  Cost  of  marketing  specialties,  513;  The    . 

cost    of   retailing,    514;    Costs    of    marketing    production  * 

goods,  517;  Conclusions,  517. 

CHAPTER  XXVI 
FINAL  CRITICISM 520-545 

The  wastes  of,  competitive  selling,  520;   Importance  of     » 
demand  creation  reviewed,  522;   Competitive   costs  elim- 
inated when  recognized  standards  prevail,   523;    Branded    4 
staples  introduced  to  reduce  price  competition  and  control 
the  market,  524;  Cause  for  excessive  selling  cost:  Inability 
of  consumer  to  judge,  526;  Importance  of  standardization 
to  improved  marketing,  527;   Who  is  responsible?,  529; 
Psychical  element  in  sales,  529;   The  middleman  system 
and  marketing  costs,  530;  Are  there  too  many  competing 
firms?,  530;  Meaning  of  the  term  "too  many  stores,"  533; 
Relation  of  number  of  stores  to  volume  of  transactions, 
533;  More  market  machinery  a  result  of  modern  methods 
of   production,   534;    Excessive   costs   of  retailing   not   all 
borne  by  the  immediate  consumer,  534 :    Advantages  of  „ 
small  store  to  consumer,  535 ;  Question  of  the  economies  of 
large  retail  stores,  536;  "Profiteering"  not  confined  to  mid- 
dlemen, 537 ;  Some  evils  of  competition :  excessive  costs,  » 
537;  Excessive  stocks,  538,  Competition  and  quality,  539;  «, 
Poor  adjustment  of  demand  and  supply,  540;   Socialism, 
540 ;  Cooperation,  541 ;  Public  markets,  parcel  post  and  ex- 
press, 542;  Cooperation  and  combination  among  compet- 
itors, 543;  Conclusion,  545. 
INDEX  547-570 


f 


PRINCIPLES  OF  MARKETING 

CHAPTER  I 
INTRODUCTION 

Marketing  consists  of  those  efforts  which  effect  transfers  in  1 
the  ownership  of  goods,  and  care  for  their  physical  distribu- 
tion. The  need  for  marketing  grows  out  of  the  division  of 
labor,  particularly  as  manifested  in  large  scale  production  and 
in  the  localization  of  industry.  This  division  of  labor,  in  turn, 
is  due  to  the  diversity  of  human  wants — a  diversity  which 
arises  not  merely  from  the  demand  for  the  prime  necessities 
of  life,  but  from  that  far  greater  number  of  acquired  wants 
which  result  from  the  seemingly  limitless  possibilities  for  hu- 
man beings  to  expand  and  develop  their  desires. 

Different  Interests. — Marketing  is  engaged  in  by  the  pro- 
ducer, the  consumer,  and  certain  specialized  agencies  including 
those  commonly  called  middlemen.  To  each  of  these,  market- 
ing appears  in  a  different  light:  to  the  farmer,  lumberman,  \ 
fisherman,  miner,  or  manufacturer,  it  affords  a  means  of  dis- 
posing of  his  surplus  products  and  of  purchasing  the  materials, 
equipment,  and  supplies  necessary  to  production;  to  the  con- 
sumer it  affords  a  means  through  which  desired  commodities 
are  made  available;  to  the  middleman  and  other  market  spe- 
cialists it  affords  a  source  of  business  income.  The  attitude 
of  each  of  the  three  groups  involved  in  marketing  must  be  un- 
derstood before  the  subject  can  be  intelligently  approached. 

The  producer  is  interested  in  marketing  since  it  affords  the 
means  through  which  he  can  sell  his  product.     He  wishes  to 

1 


) 


OF  MARKETING 

sell  for  as  much  as  possible.  The  consumer,  on  the  other  hand, 
}  desires  to  stretch  his  income  as  far  as  possible.  He  wants  to 
''  buy  for  as  little  as  he  can.  Purely  as  consumer  or  as  producer 
neither  has  a  particularly  altruistic  attitude  toward  the  other. 
Thus,  when  the  prices  of  farm  products  rise  the  farmer  re- 
joices and  the  consumer  feels  aggrieved,  but  when  the  prices 
of  farm  products  fall  the  farmer  grieves  and  the  consumer  re- 
joices. Finally,  just  as  the  interest  of  the  producer  is  to  sell 
at  the  price  which  will  bring  him  the  largest  ultimate  profit, 
and  just  as  the  interest  of  the  consumer  is  to  buy  at  that  price 
which  will  make  his  income  go  farthest,  so  the  interest  of  the 
middleman  and  the  other  specialists  of  the  market  is  to  sell 
their  service,  the  marketing  of  products,  for  the  highest  net 
return. 

It  is  evident,  then,  that  the  market  process  involves  inter- 
ests which  conflict.  But  since  no  one  is  in  all  his  relations 
to  the  market  always  in  a  single  class,  his  interests  differ 
from  time  to  time.  Each  individual  is  likely  to  be  in  at  least 
two  of  these  classes,  since  most  people  buy  and  sell.  When 
purchasing  goods  for  consumption,  or  for  use  in  production, 
each  has  the  point  of  view  of  the  consumer;  when  selling 
his  services  or  his  product,  each  has  the  point  of  view  of  the 
producer. 

Concentration  and  Dispersion.  —  The  market  machinery  of 
today  has  been  built  up  about  a  twofold  flow  of  products.  One 
gathers  and  concentrates  the  basic  raw  materials  and  food 
stuffs  at  central  points.  The  other  disperses  them  toward  the 
ultimate  consumer,  sometimes  in  their  natural  state,  but  usu- 
ally after  some  degree  of  processing.  Not  only  the  products 
but  the  forces  of  demand  and  supply  are  concentrated  at  these 
central  points.  The  transfer  of  title  between  producer  and 
consumer  is  greatly  facilitated  by  this  process  of  concentra- 
tion and  dispersion,  but  it  often  leads  to  congestion  in  the 
physical  distribution  of  the  goods.  Concentration  is  usually 
necessary  even  in  the  distribution  of  products  sold  in  their 
natural  state.  This  is  true  whether  they  be  raw  materials  of 


INTRODUCTION  3 

manufacture  or  commodities  consumed  in  their  original  form, 
It  is  also  common  in  the  marketing  of  some  manufactured 
goods  which  are  used  as  production  goods  by  other  manufac- 
turers. Concentration,  particularly  of  farm  products,  usually 
involves  two  steps.  One  is  preliminary  concentration  near  the 
source  of  production,  by  means  of  which  the  products  of  nu- 
merous small  producers  are  gathered  together  in  larger  quan- 
tities. The  other  involves  the  concentration  of  these  products 
by  the  large  dealers  in  central  markets.  From  these  central 
markets  the  products  so  concentrated  are  then  dispersed  to 
manufacturers,  in  the  case  of  raw  materials,  and  to  other  deal- 
ers for  further  dispersion,  in  the  case  of  products  ready  for 
final  consumption. 

The  process  of  concentration  and  dispersion  is  by  no  means 
uniform  with  all  products.  For  instance,  some  farm  products 
are  shipped  directly  from  producers  to  central  points,  from 
which  they  are  then  dispersed,  with  or  without  further  process- 
ing, toward  the  ultimate  consumer.  Others  are  first  collected 
at  local  markets,  and  are  then  sent  to  the  central  markets. 
Sometimes  merchandise  is  dispersed  in  large  quantities  from 
central  markets  to  smaller  markets  and  from  there  distributed 
to  consumers.  Sometimes  it  goes  directly  from  central  market 
to  consumer.  Many  products  pass  directly  from  producer  to 
consumer.  The  great  majority  of  products  are  first  concen- 
trated as  raw  materials  and  then  dispersed  as  manufactured 
products. 

Diagram  I  illustrates  the  point  which  has  just  been  made. 
It  is  impossible,  however,  to  indicate  the  relative  number  of 
producers,  consumers,  and  other  parties  involved.  To  do  so 
it  would  be  necessary  to  show  a  much  larger  number  of 
producers  and  consumers  and  also  of  middlemen  who  deal  most 
directly  with  them,  such  as  country  shippers  and  retailers. 

A  Market. — At  each  point  where  a  specific  commodity  is 
concentrated  for  sale  a  market  is  found.  This  is  true  whether 
it  is  being  concentrated  for  further  concentration,  for  disper- 
sion, or,  as  often  happens,  for  both  purposes.  Indeed,  a  market 


INTRODUCTION  5 

always  exists  unless  the  step  is  controlled  by  a  -single  business 
man.  In  that  case  no  change  of  title  is  involved. 

A  market  is,  then,  a  center  about  which  the  forces  leading 
to  exchanges  of  title  operate,  and  toward  which  and  from 
which  the  actual  goods  tend  to  travel.  It  leads  to  clarity  of 
thought  to  bear  these  two  aspects  of  market  structure  con- 
stantly in  mind;  i.  e.,  that  the  market  structure  is  built  about 
two  processes:  the  transfer  of  the  title  to  goods  from  producer 
to  consumer,  and  the  physical  transfer  of  the  goods  them- 
selves. But  the  physical  presence  of  the  goods  is  not  essential 
to  a  market,  for  the  distinguishing  characteristic  of  a  market 
is  the  fact  that  transfers  of  title  take  place  therein.1 

Channels  of  Distribution. — The  methods  by  which  this  dual 
transfer  of  goods  and  title  is  carried  on  vary  greatly.  In  con- 
sequence, many  channels  of  distribution  are  found,  the  nature 
and  form  of  which  depend  on  the  nature  of  the  product,  the 
conditions  of  its  supply  and  demand,  and  the  development  of 
market  technique.  By  the  term  "channel  of  distribution"  is 
meant  primarily  the  course  taken  in  the  transfer  of  title.  The 
transfer  of  the  goods  themselves  may  or  may  not  be  through 
the  same  channels.  In  some  cases  title  to  goods  is  passed 
several  times  while  they  are  en  route  or  in  storage.  But  ordi- 
narily the  goods  themselves  pass  along  the  same  channel  as 
does  the  title. 

Classes  of  Middlemen. — Title  may  be  transferred  through 
direct  purchase  and  sale  between  the  producer  and  the  con- 
sumer. This  is  frequently  true  of  raw  materials  sold  to  manu- 
facturers and  of  goods  sold  in  large  quantities  by  one  manu- 
facturer to  another.  On  the  other  hand,  title  may  be  trans- 
ferred to  the  final  purchaser  only  as  a  result  of  the  activity 
of  one  or  more  middlemen  who  may,  or  may  not,  hold  the 
title  themselves.  Middlemen  are,  in_-£at5t^  sometimes  classi- 
fied on  the  basis  of  their  relation  to  the  transfer  of  title.  Those 
who  buy  goods  outright,  and  thus  take  title,  are  merchants. 

*For  a  discussion  of  the  relations  between  different  markets  for  the 
same  commodity,  see  pp.  435Ht39. 


6  PRINCIPLES  OF  MARKETING 

Those  who  assist  directly  in  bringing  about  the  transfer  of 
title,  but  who  do  not  themselves  take  title,  are  fmictipjoaLmid- 
dlemen  el-exchange.  They  are  functional  middlemen  because 
theyrspecialize  in  the  performance  of  a  single  market  function 

the  transfer  of  title.  Their  efforts  are  directed,  primarily, 

toward  expediting  or  making  more  convenient  the  exchange 
of  ownership.  But  they  do  not  take  title  to  the  goods  as  does 
the  merchant.  Retailers,  jobbers,  and  wholesale  receivers  are 
the  most  common  of  the  merchant  class.  Brokers,  selling 
houses,  and  commission  men  are  common  examples  of  func- 
tional middlemen  of  exchange.2 

A  third  group  of  market  agencies,  sometimes  called  func- 
tional middlemen,  should  also  be  distinguished.3  They  are 
individuals,  firms,  and  corporations,  specializing  in  the  per- 
formance of  a  part  or  all  of  the  work  involved  in  some  one 
type  of  market  activity.  Railroads,  public  warehouses  and 
cold  storage  plants,  inspectors  and  graders,  banks,  and  in- 
surance companies,  are  common  examples.  Such  agencies 
serve  producers,  middlemen,  and  consumers  in  a  specialized 
capacity.  They  are  not,  however,  properly  called  middlemen, 
because  that  term  should  denote  direct  assistance  in  the  trans- 
fer of  title. 

An  important  distinction  can  likewise  be  drawn  between 
middlemen  who  are  engaged  primarily  in  concentrating  prod- 
ucts and  those  who  are  engaged  primarily  in  dispersing  them. 
Middlemen  for  the  dispersion  of  products  are  particularly  es- 
sential in  the  distribution  of  consumption  goods.  Jobbers  and 
retailers  occupy  an  especially  important  position.  The  former 
assemble  products  from  manufacturers  and  concentrating  mid- 
dlemen. Then  they  disperse  them  to  retailers,  who  in  turn 
disperse  to  the  consumer.  Whereas  middlemen  who  concen- 
trate products  tend  to  specialize  in  handling  one  particular 

2  The  advertising  agency  could  well  be  classed  here.    All  of  its  activ- 
ities are  directed  toward  demand  creation,  and  in  addition  it  acts  as  a 
space  broker. 

3  See  A.  W.  Shaw,  An  Approach  to  Business  Problems,  pp.  160-163. 


INTRODUCTION  7 

product  or  very  similar  ones,  dispersing  middlemen  usually 
handle  a  wide  variety.  Thus,  local  shippers  to  some  extent, 
and  central  market  receivers  to  a  large  extent,  handle  grains 
alone,  or  fruit  and  vegetables,  or  butter  and  eggs,  or  live  stock, 
or  perhaps  even  a  single  grain,  one  fruit,  eggs,  or  cattle,  alone. 
Jobbers,  on  the  contrary,  tend  to  handle  a  wide  range  of  com- 
modities, the  range  depending  in  large  part  on  the  needs  of  the 
retailers  whose  wants  they  supply.  There  are,  accordingly, 
grocery,  green  goods,  meat,  hardware,  dry  goods,  and  drug  job- 
bers, just  as  there  are  groceries,  fruit  and  vegetable  stores, 
meat  markets,  hardware,  dry  goods,  and  drug  stores. 

Classes  of  Goods. — Notwithstanding  the  fact  that  all  pro- 
duction is  guided  by  the  wants  of  the  ultimate  consumer,  large 
volumes  of  goods  are  not  desired  for  personal  consumption. 
In  fact,  three  important  classes  of  goods  can  be  distinguished: 

1.  Goods  for  personal  consumption 

2.  Production  goods:   materials  to  be  further  processed, 
which  consist  of 

a.  Raw  materials  in  their  natural  state 

b.  Semi-manufactured  goods 

c.  Completely  manufactured  parts — to  be  assembled 

d.  Supplies 

3.  Equipment  for  use  in  production  and  distribution.4 

The  production  of  goods  for  personal  consumption  is  the 
final  aim  of  the  productive  process. 

4  To  the  economist  the  creation  of  utilities,  such  as  those  of  substance,  \  i 
of  form,  of  time,  and  of  place,  is  production.  Thus,  in  the  cotton  indus-  \ 
try  the  creation  of  substance  utilities  is  involved  in  the  work  of  the 
plantation  on  which  the  cotton  is  grown;  form  utilities  are  created  in 
the  various  factories  in  which  the  raw  fibre  is  manufactured  into  cloth; 
place  utilities  are  created  by  the  transportation  agencies  involved;  and 
time  utilities  are  created  at  any  point  at  which  materials  or  the  final  ' 
products  are  stored.  It  will  thus  be  seen  that  the  creation  of  time, 
place,  and  possession  utilities  is  included  in  the  process  known  as  pro- 
duction. In  the  text,  however,  the  term  "production"  will  generally  be 
used  in  the  narrower  sense  which  excludes  these  activities  and  includes 


\  , 


8  PRINCIPLES  OF  MARKETING 

Production  goods  may  eventually,  reach  the  status  of  goods 
ready  for  personal  consumption,  they  may  be  partially  or  com- 
pletely consumed  in  producing  other  goods,  or  they  may  be 
processed  into  equipment  and  supplies.  There  are  four  im- 
portant classes  of  these  production  goods:  (a)  raw  materials 
in  their  natural  state,  such  as  coal,  iron  ore,  wool,  cotton, 
wheat;  (£>)  semi-manufactured  goods  which  must  be  further 
processed  by  those  who  use  them,  such  as  pig  iron,  leather, 
flour,  cotton  "in  the  grey";  (c)  manufactured  products  which 
will  receive  little  or  no  further  processing  themselves  but  which 
are  to  be  assembled  with  other  products,  such  as  cloth,  but- 
tons, bolts,  screws,  and  automobile  parts;  (d)  supplies,  such 
as  oil,  stationery,  and  coal  used  for  power.  Supplies  are  goods 
which  are  used  to  assist  production  or  marketing,  but  which 
do  not  become  a  part  of  the  final  product.  These  could  be 
considered  as  a  fourth  general  class.  Their  merchandising 
characteristics,  however,  warrant  including  them  as  a  sub- 
class under  production  goods. 

The  third  class  of  goods — equipment — is  used  by  produc- 
ers and  dealers  in  expediting  production  and  marketing. 
These  goods  seldom  become  the  object  of  further  exchange. 
Such  capital  assets  as  office  furniture  and  equipment,  factory 
machinery  and  power  plants,  should  be  included  here.5 

A  particular  product  may  serve  different  purposes.  Con- 
sequently, its  place  in  this  classification  may  change  with  the 
uses  to  which  it  is  put.  Coal,  for  example,  should  be  classed 
with  consumption  goods  when  used  by  the  householder,  with 
production  goods  when  used  in  the  production  of  coke  or  coal 

only  the  creation  of  substance  and  form  utilities.  The  terms  "market- 
ing" and  "distribution"  will  be  used  synonymously.  This  use  of  the 
terms  "production"  and  "distribution"  accords  with  well  accepted  usage 
in  the  field  of  industry  and  makes  for  clarity  in  discussion. 

Tor  a  somewhat  similar  classification  see  M.  T.  Copeland,  "The 
Scope  and  Content  of  a  Course  in  Marketing,"  Journal  of  Political 
Economy,  Vol.  XXVIII  (May,  1920),  pp.  375-398,  reprinted  as  Part  I 
of  his  Marketing  Problems,  pp.  2-3.  See  also  P.  T.  Cherington,  Ele- 
ments of  Marketing  (1920),  Chap.  II. 


INTRODUCTION  9 

"N 
gas,  or  in  the  generation  of  power.    J3utjmost  products  fall 

either  in  one  group  or  another,  and  even  such  products  as  coal, 
which  are  in  more  than  one  group  because  they  have  several; 
uses,  will  be  subject  to  conditions  of  distribution  which  vary 
with  the  use  to  which  they  are  to  be  put.  Since  the  condi- 
tions  of  distribution  vary  with  the  different  classes  of  goods 
it  is  essential  to  keep  this  classification  in  mind  when,  from 
point  to  point  in  later  discussions,  these  variations  are  dis- 
cussed. 


CHAPTER  II 
THE  MARKETING  FUNCTIONS 

It  is  necessary  now  to  return  from  this  brief  summary  of 
the  nature  of  marketing  to  the  definition  of  marketing  which 
was  given  in  Chapter  I.  It  was  indicated  there  that  there  are 
two  important  aspects  of  marketing.  The  first  consists  of  the 
process  of  buying  and  selling,  by  means  of  which  transfers 
in  the  ownership  of  goods  are  effected.  This  is  the  central 
fact  of  modern  distribution.  The  second  aspect  of  marketing 
concerns  the  physical  transfer  of  the  product  from  producer  to 
consumer. 

The  Marketing  Functions. — In  the  process  of  transferring 
ownership  two  important  functions — demand  creation  (sell- 
ing) and  assembly  (buying) — should  be  distinguished.  These 
are,  in  reality,  complementary  functions  leading  up  to  and 
accomplishing  the  transfer  of  title,  but  the  purpose  of  each  is 
different.  The  purpose  of  selling  is  to  find-aonarket  in  which 
the  seller's  available  product  can  be  sold  at  a  profitable  price. 
The  purpose  of  assembly  is  to  procure  for  the  consumer  at  a 
satisfactory  price  the  variety,  quality,  and  quantity  of  goods 
which  he  desires,  and  to  have  them  ready  for  his  use  at  the 
proper  time  and  place. 

The  functions  which  effect  the  physical  transfer  of  products 
from  producer  to  consumer  are  transportation  and  storage. 
Transportation  involves  the  moving  of  products  from  their 
sources  to  the  place  of  consumption;  and  storage  involves  the 
holding  of  products  from  the  time  of  their  production  until  the 
time  of  their  consumption. 

Three  other  functions  are  essential  to  marketing:  financing, 
risk-taking,  and  standardization.  The  first  two  may  be  called 

10 


THE  MARKETING  FUNCTIONS  11 

the  "ownership"  functions,1  since  their  presence  in  the  form 
in  which  we  know  them  is  due  to  the  recognition  of  property 
rights.  Standardization  involves  the  arrangement  of  goods 
into  groups  determined  by  the  size,  qualit'y,  and  quantity  the 
market  demands. 

OUTLINE  I.    THE  MARKETING  FUNCTIONS  2 

A.  Functions  of  Exchange 

1.  Demand  creation  (selling) 

2.  Assembly    (buying) J^ 

B.  Functions  of  Physical  Supply 

3.  Transportation 

4.  Storage 

C.  Auxiliary  or  Facilitating  Functions 

5.  Financing 

6.  Risk-taking 

7.  Standardization  ^ 

Each  of  the  marketing  functions  is  so  important  that  it  calls 
for  separate  and  detailed  discussion.  In  the  present  chapter, 
however,  only  the  exchange  functions — demand  creation  and 
assembly — will  be  discussed  at  length.  The  others  will  be  in- 
troduced, but  their  more  thorough  analysis  will  be  undertaken 
in  Chapters  XV,  XVI,  XVII,  and  XIX. 

1See  Homer  B.  Vanderblue,  "The  Functional  Approach  to  the  Study 
of  Marketing,"  Journal  of  Political  Economy,  Vol.  XXIX,  No.  8  (Oct., 
1921),  pp.  676-683. 

2  This  plan  for  presenting  the  marketing  functions  follows  rather 
closely  that  outlined  by  L.  D.  H.  Weld,  in  an  article  entitled  "Market- 
ing Functions  and  Mercantile  Organization,"  which  appeared,  in  the 
American  Economic  Review,  Vol.  VII  (June,  1917),  pp.  306-318.  I  have 
also  been  assisted  by  the  outline  of  functions  found  in  Nourse,  The 
Chicago  Produce  Market,  pp.  129-131. 

A.  W.  Shaw  has  outlined  the  "middleman's  functions"  with  particular 
reference  to  manufacturer's  marketing.  He  gives  the  following:  sharing 
the  risks;  transporting  the  goods;  financing  the  marketing  operations;, 
selling  or  creating  demand;  and  assembling,  assorting,  and  reshipping 
the  goods.  See  his  An  Approach  to  Business  Problems  (1916),  p.  157. 
P.  T.  Cherington,  in  -his  Elements  of  Marketing  (1920),  Chap.  I,  has 
adopted  a  grouping,  of  the  functions  which  corresponds  closely  to  the 
one  here  presented. 


12  PRINCIPLES  OF  MARKETING 

Demand  Creation. — The  first  essential  to  marketing  a 
product  is  to  bring  seller  and  buyer  in  touch  with  one  another. 
For  no  matter  how  great  may  be  the  desire  of  the  one  to  sell 
and  of  the  other  to  buy,  no  exchange  can  take  place  until 
each  knows  of  the  desire  of  the  other.  Moreover,  many  goods 
are  not  specifically  desired  by  consumers,  but  must  be  brought 
to  their  attention,  and  a  desire  for  the  goods  may  even  have 
to  be  created  before  they  will  be  purchased.  For  products 
catering  to  the  fundamental  needs  for  food,  fuel,  and  cloth- 
ing, and  generally  utilized  in  meeting  such  needs,  a  universal 
demand  exists;  it  is  already  created  through  the  elemental 
and  acquired  wants  of  the  individual.  From  this  it  follows 
that  for  the  materials  and  for  the  machinery  and  supplies  used 
in  the  production  of  these  staple  products,  a  demand  likewise 
exists.  There  are  other  goods  of  which  this  is  not  true,  and 
the  creation  of  a  demand  for  these  is  of  prime  importance 
to  their  producers.  t  Such  articles  are  sometimes  called  ".spe- 
cialties," and  in  general  are  luxuries  or  .convenience  goods.3 
They  not  only  serve  to  gratify  tlie  primary  needs,  but  also 
cater  to  those  refined  tastes  which  improved  economic  con- 
ditions  have  made  possible  to  large  numbers  of  the  consum- 
ing public. 

Improvements  in  production  during  the  past  century  have 
lowered  the  costs  of  production  of  necessities  and  created  a 
surplus  of  purchasing  power  for  many  individuals.  This  sur- 
plus above  that  needed  by  the  consumer  for  the  purchase  of 
essentials  need  not  be  spent  for  any  particular  commodity 
or  class  of  commodities.  With  the  elemental  wants  gratified 
it  may  be  spent  for  conveniences  and  luxuries.4  Inasmuch  as 

3  C.  C.  Parlin,  The  Merchandising  of  Textiles,  pp.  5-6  (quoted  in  note 
28  on  pp.  222-223. 

4  "There  is  a  drift  toward  a  better  quality  of  merchandise.    From 
Maine  to  California,  from  Duluth  to  New  Orleans,  retailers  asserted  that 
the  tendency  to  buy  better  goods  is  evident.    This  does  not  mean  a 
tendency  to  buy  extreme  top-price  articles.  .  .  .  But  the  drift  toward 
quality  means  that  there  is  a  general  lifting  up  of  the  lower  grades  of 
merchandise  toward  a  medium  or  higher  quality." — C.  C.  Parlin,   The 


THE  MARKETING  FUNCTIONS  13 

there  usually  exists  at  a  given  time  the  capacity  for  producing 
more  conveniences  and  luxuries,  as  well  as  more  staple  com- 
modities, than  the  purchasing  public  is  able  or  willing  to  buy 
at  a  price  which  will  net  a  profit  to  the  producers,  it  is  evident 
that  the  sale  of  any  individual  producer's  goods  may  depend 
primarily  upon  the  success  with  which  a  demand  has  been 
created  for  them.  There  arises,  then,  a  competition  among 
producers  of  such  articles,  and  each  must  bring  his  commodity 
to  the  favorable  attention  of  prospective  customers.  A  simi- 
lar situation  faces  the  producer  of  services.  The  typical  re- 
tail merchant  is  an  example.  True,  there  is  a  demand  for  re- 
tail service  in  general,  but  any  particular  retailer  could  be 
eliminated  with  no  great  social  loss.  Hence  each  must  create 
a  demand  for  his  particular  services. 

The  foregoing  discussion  makes  it  clear  that  the  consumer 
can  usually  exercise  an  independent  choice  of  the  goods  and 
services  he  will  consume.  This  fact  often  forces  even  the 
producers  and  merchandisers  of  commodities  which  gratify 
fundamental  needs  to  compete  for  his  patronage.  This  is  il- 
lustrated by  such  commodities  as  branded  flours.  Flour  caters 
to  elemental  wants,  but  an  especial  attempt  is  made  to  create 
a  demand  for  each  particular  brand.  Such  products  are  some- 
times called  "branded  staples,"  and  the  method  of  their  sale 
indicates  that  the  process  known  as  demand  creation  is  not 
confined  to  conveniences  and  luxuries.  Even  when  the  con- 
sumer knows  that  he  needs  an  article  and  knows  that  he  can 
buy  it,  he  frequently  requires  a  little  encouragement  before  he 
will  take  the  final  step  and  make  the  purchase. 

What  Is  Demand  Creation? — But  just  what  is  demand 
creation?  Its  purpose  is  to  control  the  direction  of  demand. 
The  process  consists  in  carrying  ideas,  or  selling  points,  about 
a  product  or  service  from  the  seller  to  prospective  purchasers.5 

Merchandising  of  Textiles  (1915),  pp.  32,  33  (published  by  the  National 
Wholesale  Dry  Goods  Association). 

5.See  A.  W.  Shaw,  An  Approach  to  Business  Problems,  Chap.  VIII. 
The  term  "demand  creation"  is  used  here  because  it  has  been  widely 


14  PRINCIPLES  OF  MARKETING 

There  are  three  distinct  methods  of  doing  this.  One  is  through 
Q)  thggiatisfactipn  derived  from  the  use  of  the  article  itself.  If  the 
consumer  has  tried  a  product  and  likes  it  better  than  others 
he  will  buy  that  product  the  next  time  he  needs  one  like  it, 
provided  the  price  is  satisfactory.  A  second  method  is 
/^through  personal  solicitation  by  salesmen.  The  third  consists 
fy  of  the  use  of  advertising,  by  means  of  the  written  or  printed 
word,  pictures,  diagrams,  and  symbols.  The  use  of  samples 
is  sometimes  considered  as  an  independent  method,  but  this  is 
not  correct,  for  they  must  be  used  in  conjunction  with  per- 
sonal solicitation,  or  advertising,  or  both.  All  of  these 
methods  are  commonly  used  conjointly.  The  satisfaction  de- 
rived from  the  product  itself  is  not  usually  considered  as  a 
result  of  marketing  effort,  but  rather  as  <&  result  of  good  pro- 
duction. Good  production,  however — particularly  of  luxuries 
and  conveniences,  and  to  some  degree  of  staples — is  com- 
monly due  to  a  careful  analysis  of  the  needs  and  desires  of 
consumers,  which  is  a  part  of  the  marketing  process. 

Modern  Emphasis  of  Demand  Creation. — The  creation  of 
demand  has  probably  always  been  associated  with  marketing, 
but  it  has  become  a  peculiarly  important  feature  of  the  modern 
system.  This  is  particularly  true  of  the  marketing  of  goods 
for  personal  consumption.  Increased  power  in  production  has 
brought  on  the  market,  either  actually  or  potentially,  a  larger 
number  of  products  than  the  public  has  been  in  the  habit  of 
consuming.  Some  of  these  are  staple  products,  some  are  lux- 
uries, and  some  are  products  new  to  the  consumer.  For  staples 

adopted.  In  many  cases  the  phrase  really  expresses  a  wish  rather  than 
an  actual  result.  For  it  is  often  true  that  real  demand  is  not  created  as 
a  result  of  any  particular  efforts,  such  as  the  producer's.  Rather  the 
buyer  is  placed  in  a  favorable  frame  of  mind  toward  a  product  by  the 
efforts  of  the  producer,  but — if  middlemen  appear,  or  if  the  buyer  does 
not  purchase  at  once — later  events  must  determine  whether  the  favor- 
able impression  which  has  been  created  can  Be  turned  into  demand. 
The  ease  with  which  a  retailer  can  often  divert  to  a  substitute  product 
the  favorable  impression  created  by  national  advertising  is  an  illustra- 
tion of  this  point. 


THE  MARKETING  FUNCTIONS  15 

and  luxuries  favorably  known  to  the  consumer  a  desire  al- 
ready exists,  and  the  problem  of  the  producers  and  merchan- 
disers thereof  is  to  sell  their  particular  product  in  competition 
with  others.  But  for  new  predicts,  or  for  products  desired  by 
but  a  small  number  of  consumers,  little  or  no  general  desire 
exists.  This  is  true  despite  the  increased  power  in  production, 
which  has  brought  these  products  on  to  the  market,  and  which 
has  resulted  in,  and  been  accompanied  by,  an  increased  pur- 
chasing power  in  the  hands  of  buyers.  For  the  effect  of  the 
increased  purchasing  power  as  manifested  in  effective  demand 
tends  to  lagt^behind  the  increased  power  in  production;  and 
there  is,  consequently,  a  constant  tendency  toward  general 
overproduction,  as  well  as  toward  overproduction  in  individual 
lines.6 

The  Role  of  Demand  Creation. — This  possibility  that  indi- 
vidual producers  will  make  more  products  than  the  public 
will  utilize  of  its  own  volition,  or  even  more  than  it  can  pur- 
chase, gives  point  to  demand  creation.  It  become.s  necessary 
for  individual  producers  to  Greater-demand  when  that  is  pos- 
sible— not  only  that  their  products  may  not  accumulate  on 
their  hands,  but  also  that  they  may  utilize  their  capital  in 
moneyjmachines,  and  materials,^as  well  as  theirj^jae',  to  the 
beslflidvafrtage.  For  it  is  the  province  of  demand  creation 
to  make  the  public  buy  more  of  the  things  it  is  accustomed  to 
consume,  to  purchase  other  products  than  is  its  habit,  to  buy 
one  articl^jii_pfe!erence  to  another  or  several  others  of  the 
same  general  kind,  or  to  patronize  one  vendor  rather  than 
another. 

Another  factor  in  the  growth  of  the  effort  directed  toward 
the  creation  of  demand  is  the  desire  of  many  producers  to 
increase  their^sales,  with  a' view  to  selling  even  more  goods 
than  theT  Immediate  needs  of  their  organization  as  a  going 
unit  demand.  But  why?  First  of  all  is  the  _mere^  desjre 
for  a  large  volume  of  business.  In  America  in  particular  there 

&— -^sw,^..^-  ^ 

6  Overproduction  means  that  there  are  more  goods  on  the  market  than 
will  be  bought  at  remunerative  prices. 


16 


PRINCIPLES  OF  MARKETING 


seems  to  have  developed  an  eagerness  to  become  the  "largest" 
in  town,  city,  country,  or  world.7  This  may  prove  incentive 
enough  for  demand  creation.  It  arises  from  the  ambition  for 
power  and  the  esteem  of  one's  fellows.  But  back  of  the  ef- 
fort to  create  a  demand  for  products  is  almost  invariably 
found  the  need  or  desire  of  the  seller  to  increase_orjortify  his 
profits.  If  his  sales  are  large,  certain  results  are  likely  to 
follow.  His  grossj^ceirjts  will  be  greater,  and  the  unit  expense 
of  producing,  or  selling,  or  both,  may  decline  with  the  en- 
larged volume  of  business.  For  example,  the  reduced  cost  of 
selling  and  of  production  per  unit  which  follows  the  increased 
demand  stimulated  by  advertising,  in  many  cases  more  than 
offsets  the  cost  of  the  advertising.8  Again,  increased  sales 
tend  to  bring  a  greatej^dej|n3e_j^  the  market. 

And  this  in  turn  may  give  to  the  producer  more  of  monopoly 
power,  or  at  least  a  stronger  position  in  the  industrial  and 
commercial  world,  thereby  reducing  certain  market  risks,  such 
as  the  risk  of  competition.  Finally^JLhfi— expansion  of  his 
market  which  results  from  successful  demand  creation  fortifies 
the  seller  against  local  variations  in  the  demand  for  his 
product,  variations  which  might  prove  disastrous  if  his  market 
were  confined  to  a  single  locality. 

Assembly. — The  assembling  activities  of  marketing  are 
complementary  to  demand  creation.  Their  purpose  is  to  bring 

7  "Possibly  the  chief  influence  in  the  long  run  in  promoting  combina- 
tions of  capital,  as  well  as  their  most  far-reaching  effect,  is  the  element 
of  personal  ambition  which  is  fostered  by  monopoly." — J.  W.  Jenks, 
The  Trust  Problem  (1900),  p.  73. 

8 Some  hypothetical  cases  will  illustrate  these  points: 


j 

olumc  of 
Business 

Unit  (70** 
of 

Unit  Cost 
of 

Total 
Unit 

Unit 

Unit 

Total 

( 

in  units) 

Production 

Selling 

Cost 

Price 

Profit 

Profit 

Case  1  — 

100,000 

$0.50 

$0.25 

$0.75 

$0.80 

$0.05 

$   5,000 

Case  2  — 

200.000 

0.50 

0.25 

0.75 

0.80 

0.05 

10,000 

Case  3  — 

200,000 

0.50 

0.27 

0.77 

0.80 

0.03 

6,000 

Case  4  — 

200,000 

0.50 

0.24 

0.74 

0.80 

0.06 

12,000 

Case  5  — 

200,000 

0.45 

0.30 

0.75 

0.80 

0.05 

10,000 

Case  6  — 

200,000 

0.40 

0.30 

0.70 

0.80 

0.10 

20,000 

Case  7  — 

300,000 

0.40 

0.20 

0.60 

0.80 

0.20 

60,000 

*  Increased  sales  efforts  have  been  exerted  in  these  cases. 


THE  MARKETING  FUNCTIONS  17 

commodities  together  where  they  are  wanted  for  immediate^ 
use  in  production  or  in  personal  consumption.  The  goods 
which  the  ultimate  consumer  and  the  producer  desire  come 
from  scattered  areas  of  production.  They  are  produced  not 
only  in  the  country  or  district  in  which  he  resides,  but  in  dis- 
tant areas  and  foreign  lands  as  well.  These  products,  to  be 
available  for  use,  must  be  assembled  at  convenient  points  in 
the  volume  and  variety  required. 

What  Is  Assembly? — Assembly  should  not  be  confused 
with  transportation  and  storage.  For  whereas  these  are  func- 
tions of  physical  distribution,  assembly  involves  judgment. 
What  products  will  consumers  need?  In  what  quantities? 
How  rapidly  will  they  be  consumed?  Where  can  they  be  ob- 
tained? Were  it  not  for  our  marketing  machinery  each  indi- 
vidual, family,  dealer,  and  factory  would  need  to  answer  these 
questions  unaided.  Their  needs  could  not  be  met  as  now 
through  daily  purchases,  but  only  through  planning  far  in  ad- 
wince,  sometimes  for  years,  and  through  keeping  in  touch  with 
the  producers  of  desired  articles  and  with  those  who  transport 
and  store  them.  But  today  the  average  consumer,  or  even 
the  average  manufacturer,  goes  to  a  middleman  and  purchases 
what  he  wants.  Most  commodities  are  available  on  short 
notice  because  of  the  activities  of  a  number  of  specialists  who 
make  it  their  business  to  judge  in  advance  what  the  nature  and 
volume  of  demand  will  be,  who  keep  in  constant  touch  with 
sources  of  demand  and  supply,  and  who  order  the  goods  far 
enough  in  advance  of  final  demand  to  have  them  ready  for 
use.9 

9  "The  term  'assembling,'  as  here  used,  does  not  mean  the  actual 
physical  trajisp_oilfltion  ni-eomjoodities  from  one  place  to  another,  but 
rather  tfte-^geking  out  of  sourcesy  the  making  of  business  connections 
whereby  commodities  may  bebought,  and  the  -stTHTy"- TJ^^SScet  con- 
ditions so  that  they  may  be  bought  at  the  lowest  price  possible. 

"Assembling  therefore  involves  all  the  services  connected  with  buy- 
ing."— L.  D.  H.  Weld,  "Marketing  Functions  and  Mercantile  Organiza- 
tion," The  American  Economic  Review,  Vol.  VII  (June,  1917),  p.  307. 


18  PRINCIPLES  OF  MARKETING 

The  final  process  in  assembly  is,  of  course,  that  in  which 
the  consumer  brings  together  the  things  which  he  desires  to 
consume.  But  back  of  him  there  may  have  been  a  long  line 
of  assemblers — retailers,  jobbers,  commission  men,  manufac- 
turers. Looked  at  from  the  point  of  view  of  the  consumer 
the  work  of  all  these,  as  well  as  of  the  agencies  preceding  the 
manufacturer,  is  to  assemble  and  prepare  commodities  for 
final  consumption.  The  consumer  looks  chiefly  to  the  retailer 
for  these  commodities,  and  the  chief  function  of  the  retailer 
is  to  assemble  them  for  him.  But  the  retailer,  in  turn,  looks 
to  the  jobber,  the  manufacturer,  and  the  commission  man,  for 
the  goods  he  handles.  They  assemble  for  him.  The  jobber 
in  particular  plays  an  important  part  in  this  process.  The 
grocery  jobber,  for  example,  assembles  the  hundreds  of  va- 
rieties and  brands  of  goods  which  come  from  all  parts  of  the 
world,  and  makes  them  available  to  the  retail  store. 

Assembly  by  Manufacturers, — Manufacturing  plants  do 
gome  of  their  own  assembling.  They  are,  consequently,  as- 
sembling indirectly  for  those  who  later  buy  the  finished  prod- 
uct of  their  factories.  The  automobile  is  an  assembled 
product  in  this  sense,  as  well  as  in  the  manufacturing  sense. 
Even  the  manufacturers  of  automobiles  who  make  most  of 
their  own  parts  assemble  some  parts,  and  perhaps  all  of  the 
accessories  and  equipment.  Tires,  speedometers,  lighting  sys- 
tems, tops,  wind  shields,  wheels,  axles,  springs — some  or  all 
of  these  are  bought  ready  to  install  even  by  the  largest  manu- 
facturers. Many  cars  are  assembled  almost  entirely  from 
parts  made  by  other  manufacturers.  Furthermore,  the  pro- 
duction of  most  of  these  parts  involves  the  assembly  of  equip- 
ment, supplies,  raw  materials,  and  semi-manufactured  prod- 
ucts at  the  factory.  Assembling  by  manufacturers  may  also  be 
more  direct.  For  example,  some  producers  of  a  particular  part 
of  a  "line"  of  goods  purchase  or  handle  on  consignment  the 
related  products  of  other  manufacturers.  In  this  manner  they 
are  enabled  to  handle  a  "full  line"  of  goods,  with  the  advan- 
tages in  selling  which  a  complete  line  sometimes  carries  with 


THE  MARKETING  FUNCTIONS  19 

it.  Moreover,  their  overhead  expenses  may  thus  be  spread 
over  a  greater  volume  of  sales.  Lumber  manufacturers  who 
own  their  own  retail  yards  usually  handle  other  building  ma- 
terials; tool  manufacturers  and  manufacturers  of  machinery 
frequently  handle  related  but  non-competing  products  made 
by  other  firms. 

Sometimes  the  manufacturer's  own  purchasing  department 
searches  out  the  sources  of  the  materials  needed.  This  is  par- 
ticularly true  of  large  establishments  and  of  those  which  have 
difficulty  in  finding  the  particular  kind  of  raw  material  they 
need.  But  many  manufacturers  depend  upon  middlemen  to  do 
this  work  for  them.  Few,  if  any,  buy  all  their  materials,  sup- 
plies, and  equipment  directly  from  the  producers.  A  j^. 

Concentration  and  Dispersion  a  Part  of  Assembly. — The 
process  of  concentration  and  dispersion,  mentioned  in  the  first 
chapter,  is  a  part  of  the  work  of  assembly.  But  assembly  is 
the  more  complex  process  whereby  the  numerous  kinda.of 
products  demanded  are  made  available  to  the  user  in  the 
required  qualities  and  quantities  and  at  the  proper  time  and 
place ;  whereas^jiQnrpntratinn  arid^dispersioiijiay^  to  do  with 
the  marketing  of  Jndiv4g!ual_products.  Apples,  for  example, 
which  are  produced  by  small  growers  in  different  parts  of 
the  country,  may  be  concentrated  at  central  markets,  from 
which  they  are  dispersed  to  ultimate  consumers.  This  process 
is,  nevertheless,  a  part  of  assembly,  for  such  goods  are  being 
assembled,  along  with  other  products,  for  the  convenience  of 
consumers.  It  is  evident  that  the  same  process  may  be  con- 
centration or  dispersion  from  one  point  of  view  and  assembly 
from  another.  Diagram  II  illustrates  the  concentration  and 
dispersion  of  a  few  products,  and  shows  their  relation  to  the 
process  of  assembly. 

x Transportation  and  Storage. — The  physical  distribution  of 
products  consists  in  the  highly  specialized  and  technical  activ- 
ities involved  in  transportation  and  storage.  It  is  a  common- 
place of  industrial  history  that  improved  transportation  makes 
possible  large  markets,  large  scale  production,  and  specializa- 


20 


THE  MARKETING  FUNCTIONS  21 

tion  in  industry;  that  it  has  increased  the  variety  of  goods 
available  for  consumption,  and  has  reduced  the  cost  of  their 
physical  distribution.  The  chief  function  of  physical  distribu- 
tion is  to  take  goods  from  the  place  in  which  they  are  produced 
to  the  place  in  which  they  are  to  be  consumed.  This  is  called 
the  "creation  of  place  utilities,"  and  is  the  function  which 
transportation  systems  perform. 

Storage,  likewise,  is  essential  to  commerce.  The  majority 
of  products  are  produced  "for  thp^market,"  and  not  to  fil],  ex- 
plicit orders.  This  is  particularly  true  of  agricultural  products 
and  of  many  raw  materials.  But  it  is  also  true  of  manufac- 
tured products;  for  the  ultimate  consumer — from  whom  the 
final  demand  for  all  goods  comes — seldom  orders  goods  far 
enough  in  advance  of  purchase  for  them  to  be  made  on  order. 
Even  with  custom-made  goods  only  the  final  fashioning  of 
the  product  is  ordered  by  the  consumer.  All  preceding  pro- 
duction— even  though  made  on  order — is  for  the  market  in 
the  sense  that  the  final  demand  of  the  ultimate  consumer 
is  an  unknown  quantity — a  demand  which  often  falls  short  of 
expectations  so  far  as  particular  products  are  concerned,  and 
sometimes  for  products  in  general.  In  addition  :o  these  con- 
siderations is  the  further  fact  that  it  is  desirable  to  have  a 
surplus  of  most  products  at  hand.  This  is  necessary  to  pro- 
tect against  slow  deliveries  and  to  be  prepared  for  unforeseen 
increases  in  demand.  Dealers  in  particular  must  stock  goods 
to  meet  such  contingencies.  Again,  many  products,  particu- 
larly agricultural  products,  are  not  only  produced  for  the 
market,  but  become  ready  for  use  during  shgrt  periods  of  the 
year.  Such  goods  must  be  stored  and  kept  in  condition  until 
the  time  of  reduced  production,  if  they  are  to  be  available  for 
consumption  at  all  times,  and  if  the  large  supplies  which 
mature  during  a  short  time  are  to  be  profitably  sold. 

The  foregoing  discussion  shows  the  necessity  for  storing 
products  at  various  points  between  the  prime  producer  and 
the  ultimate  consumer,  and  indicates  its  importance  to  indus- 
try. Storage  involves  the  technical  processes  of  warehousing 


\ 


22  PRINCIPLES  OF  MARKETING 

and  finance.  The  latter  is  a  separate  marketing  function 
which  will  be  discussed  at  a  later  point,  but  warehousing  now 
warrants  a  word. 

Warehousing. — The  technical  problems  of  warehousing  are 
many.  They  involve  the  maintenance  of  suitable  facilities 
for  handling  and  conditioning  products,  as  well  as  provision 
for  adequate  storage  space.  In  addition  to  this  the  rules 
and  regulations  laid  down  by  boards  of  trade,  and  by  state 
and  Federal  acts  providing  for  the  supervision  of  storage  fa- 
cilities, must  be  carefully  observed.  A  special  type  of  ware- 
house has  been  provided  for  keeping  such  products  as  butter, 
eggs,  and  meat  in  proper  condition.  Storage  is  likewise  an 
adjunct  of  transportation.  Perishable  products,  for  example, 
deteriorate  rapidly  while  en  route  to  market  if  they  are  not 
kept  at  the  proper  temperature.  Even  the  ordinary  milk 
wagon  must  have  refrigeration  facilities  during  the  warm 
months. 

Financing. — Modern  marketing  requires  vast  resources  in 
machines,  materials,  land,  and  men,  and  vast  quantities  of 
goods  must  be  held  in  storage  for  future  use.  To  meet  these 
demands  of  our  economic  system  the  control  of  funds  is  neces- 
sary, and  it  is  the  means  by  which  these  funds  are  supplied 
which  is  called  financing.  A  familiar  situation  is  found  in 
the  case  of  the  man  who  is  fitted  for  running  a  retail  store  but 
who  is  without  funds.  At  the  same  time  there  are  others  who 
have  funds  but  lack  the  time,  the  desire,  or  the  ability  to  un- 
dertake the  project.  Means  have  been  developed  to  bring 
these  together.  In  many  lines  of  business  there  are  seasonal 
peaks  during  which  much  larger  sums  are  needed  than  in  other 
seasons  of  the  year. 10  Firms  so  engaged  must  be  possessed 
of  large  financial  resources  in  order  to  meet  these  recurring 
periods.  Or,  being  without  sufficient  capital,  they  must  seek 
accommodation  elsewhere.  In  yet  other  cases,  business  men 

10  See  Morris  A.  Copeland,  "Seasonal  Problems  in  Financial  Adminis- 
tration," Journal  oj  Political  Economy,  Vol.  XXVIII  (Dec.,  1920),  pp. 
793-826. 


THE  MARKETING  FUNCTIONS  23 

may  accumulate,  or  could  accumulate,  sufficient  resources  to 
meet  all  such  peak  loads,  but  they  may  prefer  to  invest  their 
accumulations  in  extensions  of  the  business,  or  even  to  invest 
elsewhere.  Otherwise  such  surplus  funds  can  be  utilized  to 
advantage  only  a  part  of  the  year  and  may  remain  in  the 
bank  drawing  no  return,  or  a  small  return,  for  the  remainder 
of  the  time.  To  meet  such  problems  as  these  is  the  function 
of  financing. 

Risk-Taking. — The  whole  marketing  process  by  means  of 
which  goods  are  taken  from  producer  to  consumer  involves 
risk.  This  risk  is  assumed  by  those  who  take  part  in  mar- 
keting, and  particularly  by  those  who  take  title  to  goods. 
There  is  risk  of  loss  from  fire,  flood,  storm,  theft,  deterioration; 
from  bad  debts  or  general  financial  difficulties  outside  the 
control  of  the  individual.^  Styles  may  change  or  the  market 
may  be  misjudged,  leaving  unsalable  products  in  the  hands 
of  those  who  hold  them.  Increased  supplies,  reduced  demand, 
or  changes  in  the  value  of  money  may  change  the  prices  of 
commodities.  Some  of  these  risks  can  be  wholly  or  partly 
insured  against,  or  the  burden  can  be  shifted  to  the  shoulders 
of  those  who  specialize  in  bearing  them.  With  many  others, 
however,  the  business  man  must  himself  contend.  They  are 
the  irreducible  risks  of  marketing  The  means  by  which  these 
risks  are  insured  against,  shifted,  and  borne,  is  an  important 
phase  of  marketing. 

Standardization. — The  standardization  of  merchandise  has 
been  called  an  auxiliary  function  because  it  is  essential  to 
effective  exchange  of  title  and  is  important  to  effective  trans- 
portation and  storage.  It  is  in  its  relation  to  the  methods 
of  transferring  title — to  bringing  about  a  sale — that  standard- 
ization compels  the  greatest  interest.  This  is  because  the  man- 
ner of  sale  of  a  product  depends  in  part  on  the  extent  to  which 
it  is  known  to  be  of  uniform  quality,  size,  and  type,  and  the 
extent  to  which  these  characteristics  conform  to  recognized 
standards.  The  importance  of  standardization  to  marketing 
can  be  better  grasped,  consequently,  after  an  analysis  of  the 


24  PRINCIPLES  OF  MARKETING 

bases  on  which  sales  are  made.  And  since  this  analysis  is  of  it- 
self important  to  an  understanding  of  later  discussions  it  will 
be  inserted  at  this  point,  even  though  the  detailed  discussion 
of  standardization  is  postponed  to  a  later  chapter. 

Bases  of  Sale. — There  are  three  fundamental  bases  of  ex- 
change: sale  in  bulk,  sale  by  sample,  and  sale  by  descrip- 
tion.11 Where  goods  are  sold  in~Fulk,  good,  fair,  and  indif- 
ferent are  taken  as  they  come,  as  when  a  "farmer's  car"  of 
potatoes  is  purchased,  coal  is  bought  by  the  "mine  run,"  or 
eggs  by  the  "case  count."  But  such  sales  are  commonly 
made  after  a  more  or  less  careful  inspection  of  the  actual 
products  to  be  bought  has  been  made  by  the  prospective 
purchaser — in  which  case  they  may  be  designated  as  "sales 
by  inspection."  Sale  by  inspection  is  found  in  many 
purchases  at  retail,  as  when  the  housewife  goes  to  the  grocery 
store  to  buy  fruits  and  vegetables,  or  when  clothing  is 
purchased  for  individual  wear.  In  these  cases,  the  par- 
ticular article  to  be  purchased  is  seen  and  inspected  by  the 
purchaser. 

Sale  by  sample  implies  that  the  bulk  of  the  product  can  be 
adequately  represented  by  a  sample  taken  more  or  less  at 
random.  This  implies  also  that  the  products  run  or  can  be 
made  to  run  true  to  sample,  and  that  the  purchaser  has  faith 
in  the  ability  and  intention  of  the  seller  to  deliver  goods  like 
the  sample.  The  sample  is  seen  before  the  goods  are  pur- 
chased or  delivered;  the  buyer  purchases  from  it,  and  expects 
the  goods  he  buys  to  be  like  it.  Samples  may  be  presented 
by  the  seller  for  the  purchaser  to  choose  from,  or  the  pur- 
chaser may  present  a  sample  to  indicate  wHat  he  desires.  In 
either  case,  the  final  products  may  be  inspected  to  determine 
whether  they  conform  with  sufficient  exactness  to  the  sample. 
Many  manufactured  products  sold  through  salesmen  to  retail 

11  See  also  Homer  B.  Vanderblue,  "The  Marketing  Function  of  Adver- 
tising," in  Advertising  and  Selling  (June  5,  1920),  pp.  16-18,  and  A.  W. 
Shaw,  An  Approach  to  Business  Problems  (1916),  pp.  105-109. 


THE  MARKETING  FUNCTIONS  25 

stores  are  purchased  from  samples,  and  bulky  articles,  such  as 
furniture,  are  frequently  sold  to  consumers  from  samples  on 
the  retail  floor.  When  goods  are  purchased  because  they  have 
given  satisfaction  in  the  past,  which  is  the  method  of  buying 
most  consumption  goods,  they  are  really  bought  by  sample. 
A  method  called  "sampling"  is  also  used  when  a  "sample" 
of  the  delivered  product  is  taken  from  the  bulk  and  analyzed 
before  the  salesj)rice  is  determined.  In  such  cases  the  basis 
on  which  payment  is  to  be  made  has  been  determined  in  ad- 
vance. But  on  delivery  it  must  be  determined  in  what  de- 
gree the  product  fulfills  the  conditions  previously  agreed  upon. 
Sugar  beets  are  sold  on  the  basis  of  their  sugar  content,  and 
ores  are  sold  on  the  basis  of  their  metal  content,  as  deter- 
mined after  such  a  sample  has  been  made. 

Sale  by  description  is  made  by  word  of  mouth  or  by  means 
of  symbols,  printed  and  written  words,  blue  prints,  and  speci- 
fications. The  description  is  really  a  specification  on  the  part 
of  the  buyer  as  to  what  he  will  purchase,  or  on  the  part  of 
the  seller  as  to  what  he  has  for  sale.  This  method  implies 
that  the  party  endeavoring  to  describe  a  product  can  describe 
it  in  a  manner  which  will  enable  the  other  party  to  the  ex- 
change to  understand  his  description.  It  implies  in  addition, 
as  with  sale  by  sample,  confidence  in  the  ability  and  inten- 
tion of  the  seller  to  deliver  goods  like  the  description.  Of 
sellers'  descriptions  the  mail  order  catalogue  and  advertising 
are  good  examples;  plans  for  a  house,  factory,  or  machine, 
are  examples  of  buyers'  descriptions. 

All  these  methods  may  be  combined  in  the  sale  of  a  single 
product.  When  household  utensils — washing  machines,  elec- 
tric sweepers,  fireless  cookers — are  sold,  they  are  sometimes 
sent  to  the  home  for  trial.  If  a  sale  is  made  the  article  sent 
is  kept.  This  is  sale  in  bulk,  but  it  has  probably  been  pre- 
ceded by  advertising  which  led  the  housewife  to  go  to  this 
store  and  see  a  sample  demonstrated — sale  by  description  and 
by  sample. 


26  PRINCIPLES  OF  MARKETING 

OUTLINE  II.    METHODS  OF  SALE 

Balk /Bulk  ("as  is") 

I  inspection 

f  Seller's  sample 
Sampled  Buyer's  sample 
[Products  in  use 

("personal  salesmanship 
Seller's  description-^  advertising 

[symbol  or  trade  name 
Buyer's  specifications 

Grade  names — representing  standards  determined 
by  governmental  authority,  custom, 
or  associated  action. 


Description- 


The  Nature  of  Standardization. — Sale  by  sample  and  most 
sales  by  description  rest  upon  the  standardization  of  prod- 
ucts.12 These  methods  of  sale  are  possible  only  when  the 
buyer  is  certain  that  the  conditions  of  production  are  such 
that  goods  can  be  delivered  like  the  sample  or  like  the  de- 
scription. This  condition  prevails  throughout  most  modern 
manufacture,  and  consequently  large-scale  standardized  pro- 
duction has  made  possible  not  only  sale  by  sample,  but  the 
enormous  expansion  of  sale  by  description  through  the  use 
of  salesmen  and  advertising.  Advertising  in  most  of  its  forms 
is  too  expensive  to  use,  unless  the  single  advertisement  can 
be  made  to  describe  a  product  which  can  be  duplicated  enough 
times  to  meet  all  or  a  large  part  of  the  demand  which  is 
created,  and  sold  in  sufficient  volume  to  warrant  the  advertis- 
ing expense.  A  further  economy  in  the  sale  of  standardized 
products  results  from  the  fact  that  a  buyer  may  purchase  in 
large  quantities  after  simply  seeing  a  sample,  or  hearing  or 
seeing  a  description.  For  if  confidence  inheres  in  the  intention 

12  Many  "want  ads,"  such  as  those  advertising  houses  and  household 
furniture  for  sale,  are  exceptions.  A  single  article  is  there  described, 
whereas  most  efforts  to  sell  by  description  endeavor  to  sell  many  simi- 
lar articles.  The  actual  sale,  however,  in  the  case  of  the  "want  ad" 
may  be  completed  only  after  inspection. 


THE  MARKETING  FUNCTIONS  27 

and  ability  of  the  seller  to  deliver  goods  like  the  sample  or 
description,  each  individual  part  of  a  purchase  need  not  be 
inspected.  The  sale  of  raw  materials,  and  of  goods  bought 
by  retail  stores,  is  greatly  facilitated  when  these  methods  of 
sale  are  used.  Purchase  by  brand  at  retail  on  the  part  of 
the  final  consumer  has  the  same  advantages,  and  results 
from  the  same  considerations.13 

Grading. — An  important  adjunct  to  standardization  is 
grading.  Grading  involves  the  division  of  products  into 
classes  made  up  of  units  possessing  similar  characteristics  of 
size  and  quality.  In  so  far  as  products  are  standardized  in 
their  production,  grading  is  unnecessary,  or  at  most  it  involves 
simply  the  determination  of  the  grade  of  products  which  are 
already  of  uniform  size  and  quality.  Some  goods  are  pro- 
duced under  conditions  which  make  them  all  of  the  same  size 
and  quality;  consequently  they  all  conform  to  a  given 
standard,  and  no  assorting  is  required.  This  is  usual  with 
manufactured  products.  But  when  goods  as  produced  are  not 
of  uniform  quality  and  size  they  must  be  sorted  into  groups 
which  are.  Raw  materials  in  particular  are  not  uniform  as 
they  come  from  the  field,  forest,  and  mine,  whereat  the  manu- 
facturing plants  utilizing  them  usually  demand  uniform  ma- 
terials conforming  to  certain  standards.14  This  demand  for 
standardized  materials  on  the  part  of  manufacturers  is  one  of 
the  chief  causes  for  grading  raw  materials.  But  even  con- 
sumers commonly  prefer  standardized  products.  When  these, 
products  are  branded  with  the  mark  of  the  producer  or  dis- 
tributor, or  when  they  are  sold  by  grade,  the  consumer  is  en- 
abled to  purchase  by  description  and  is  thereby  saved  from 
uncertainty  and  the  need  for  inspecting  each  purchase.  He 
knows  that  each  product  he  buys  will  be  like  the  last. 

Summary. — Marketing  consists  of  buying  and  selling  and 
of  physical  distribution.  Under  modern  conditions  an  ex- 
tensive machinery  for  purchase  and  sale  is  found,  a  machinery 

13  See  p.  403. 

"The  reasons  for  this  will  be  discussed  in  Chap.  VI. 


28  PRINCIPLES  OF  MARKETING 

which  involves  the  function  of  demand  creation  (selling)  and 
the  function  of  assembly  (buying).  Physical  distribution 
consists  of  the  technical  functions  of  transportation  and 
storage.  And  somewhere  products  must  be  sorted  into  classes 
determined  by  their  nature,  size,  and  quality.  This  function 
is  called  standardization.  The  control  of  funds  is  also 
essential.  This  has  led  to  the  development  of  the  function 
called  financing.  Finally,  throughout  the  whole  marketing 
process  the  risk  of  ultimate  financial  loss  from  many  possible 
sources  must  be  borne. 


§ 


CHAPTER  III 
MARKETING  FARM  PRODUCTS1 

The  farm  is  an  important  source  of  raw  material  for  manu- 
facture. But  many  farm  products  are  ready  for  personal  con- 
sumption without  processing  in  any  way,  or  at  least  with  but 
slight  charfge  from  their  original  state.  The  existence  of 
these  two  classes  of  farm  products — production  goods  and  con- 
sumption goods — makes  it  necessary  to  keep  clearly  in  mind 
that  the  marketing  of  some  agricultural  products  involves  a 
process  for  placing  them  in  the  hands  of  manufacturers,  and 
that  from  this  point  their  distribution  is  a  problem  of  the 
manufacturer's  market.  Products  of  this  nature  must  be  dis- 
tinguished from  others,  the  distribution  %f  which  involves 
transferring  them  to  consumers  in  their  triginal  form.2 


Characteristics   of   Agriculture. — Agriculture,   in   contrast 
with  a  prevailing  tendency  in  manufacture,  is  a  small  scale  in- 

1  There  is  a  sizable  literature  dealing  with  the  marketing  of  farm 
products.    Among  the  more  accessible  are  the  publications  of  the  U.  S. 
Department  of  Agriculture  and  of  the  State  Agricultural  Experiment 
Stations.    Recently  the  Federal  Trade  Commission  has  issued  several 
reports  relating  to  farm  products.    Among  the   more  valuable  books 
may  be  mentioned  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products; 
G.  G.  Huebner,  Agricultural  Commerce;  E.  G.  Nourse,  The  Chicago 
Produce  Market;  Theodore  Macklin,  Efficient  Marketing  for  Agricul- 
ture; and  B.  H.  Hibbard,  Marketing  Agricultural  Products. 

2  In  the  discussion  to  follow,  raw  materials  for  manufacture,  whether 
the  product  of  the  farm,  forest,  or  mine,  are  frequently  considered  to- 
gether, regardless  of  source.    But  if  the  classification  on  page  7  is  kept 
in  mind  no  confusion  should  arise  in  the  mind  of  the  reader. 

29 


1 


30  PRINCIPLES  OF  MARKETING 

dustry;  and  unlike  manufacture,  it  is  carried  on  by  scattered 
producers  located  far  from  the  great  body  of  consumers.  Thus 
the  main  output  of  shoes  in  this  country  is  confined  to  a  rela- 
tively small  number  of  factories  located  in  the  midst  of  dense 
populations,  but  the  hides  for  the  leather  used  in  their  manu- 
facture are  obtained  from  cattle  raised  upon  thousands  of 
farms  and  ranches  in  the  United  States  and  in  foreign  coun- 
tries. Even  in  the  manufacture  of  flour,  an  industry  in  which 
large  scale  methods  are  not  so  predominant,  there  are  dozens, 
perhaps  hundreds,  of  farms  growing  wheat  to  each  mill  grind- 
ing it  into  flour. 

On  the  other  hand,  specialized  production — which  is  also  a 
characteristic  of  manufacture — has  become  characteristic  of 
agriculture.  In  fact,  the  development  of  specialized  produc- 
tion has  gone  so  far  that  the  self-sufficing  farm  of  a  former  day 
is  no  longer  found.3  Each  farm  produces  for  the  market  and 
must  exchange  its  surplus  for  the  surplus  of  other  farms,  and 
for  the  output  of  factories.  The  products  from  one  agricul- 
tural section  or  from  one  farm  must,  consequently,  be  dis- 
tributed to  the  people  on  other  farms  and  in  other  agricultural 
sections  as  well  as  to  factories  and  to  consumers  in  populous 
centers.  The  grain  of  the  Dakotas  supplies  the  mills  of 
Minneapolis,  Buffalo,  and  Rochester.  The  stock  of  the  Moun- 
tain states  moves  east  to  the  packing  plants  of  Omaha  and 
Chicago  and  west  to  supply  the  Pacific  coast,  Alaska,  and 
Hawaii.  The  fruit  of  Southern  California  moves  north  to 
Washington  and  finds  its  way  into  the  Dakotas,  the  corn  belt, 
and  eastern  markets.  The  cotton  of  the  South  moves  north 
and  the  corn  of  Illinois  and  Iowa  moves  south. 

Variation  of  Marketing  Methods. — The  marketing  prob- 
lem is  not  the  same  for  all  products.  Perishable  fruits  and 
vegetables  must  be  consumed  or  processed  almost  as  soon  as 
harvested.  And  since  they  are  highly  perishable,  facilities 

'See  Ellen  Churchill  Semple,  American  History  and  its  Geographic 
Conditions  (1903),  pp.  369  ff. 


^MARKETING  FARM  PRODUCTS  31 

must  be  provided  to  carry  them  from  the  farm  to  table  or 
factory  quickly  and  without  deterioration.  But  most  farm 
products  are  not  so  perishable.  Furthermore,  they  are  more 
largely  raw  materials  to  be  sold  to  mills  and  factories  than 
products  ready  for  personal  consumption.  Wheat  and  other 
cereals,  live  stock,  cotton,  wool,  and  tobacco  are  altered  be- 
fore they  are  finally  consumed.  With  these,  other  problems  ' 
are  important,  such  as,  for  example,  warehousing  over  long 
periods  of  time,  and  the  provision  of  capital  with  which  to 
carry  the  stored  commodities.  Even  a  single  kind  of  product 
is  usually  marketed  in  a  number  of  ways  through  the  addi- 
tion or  elimination  of  steps.  Fruit  and  vegetablesmay  be  sold 
directly  by  the  grower  to  the  housewife  or  canning  factory, 
but  California  oranges  are  sometimes  most  effectively  mar- 
keted through  five  middlemen,  each  representing  a  separate 
link  in  the  market  chain.  Again,  a  large  volume  of  agricul- 
tural staples  is  sold  directly  to  factories  and  mills;  but  grain 
is  usually  sold  to  the  local  buyer,  thence  to  the  central  market 
dealer,  and  by  him  it  may  be  sold  to  a  mill  in  a  city  outside 
the  central  market  or  to  a  dealer  in  another  city,  and  so  on. 
The  same  dealer  frequently  sells  to  different  classes  of  cus- 
tomers and  in  different  markets,  as  determined  by  the  offers 
he  receives  and  by  the  prevailing  prices.  Cattle  are  often 
sold  to  country  buyers,  who  consign  them  to  commission  men, 
who  sell  them  both  to  buyers  representing  the  great  meat  pack- 
ers and  to  other  commission  men  who  are  buying  for  farmers 
engaged  in  fattening  stock  for  market.  But  many  cattle  are 
sent  directly  from  growers  to  commission  men,  others  are  sold 
to  local  slaughter  houses,  and  some  are  sold  directly  to  the 
packers.  Cotton  may  be  sold  directly  from  the  plantation^ 
gin  to  the  local  mill,  or  it  may  go  through  from  one  to  five 
or  six  dealers  and  finally  reach  a  New  England  or  European 
mill.4 

4 "Cotton  is  shipped  to  Great  Britain  by  three  classes  of  dealers:   (1) 
by  American  shippers,  who  consign  to  Liverpool  merchants;    (2)    by 


32  PRINCIPLES  OF  MARKETING 

Difficulties  in  Transportation  and  Storage. — Farm  prod- 
ucts are,  in  general,  bulky.    That  is,  the  weight  is  great  as 
compared  to  the  value.5     This  fact  makes  their  transportation 
and  storage  difficult  and  expensive.    Bulk  is,  of  course,  a  rela- 
tive term;  and  some  of  the  perishable  products,  fruits  and 
vegetables  in  particular,  can  stand  an  expensive  transportation  - 
service  because  of  their  high  value.    Other  farm  products  are  j 
less  perishable  but  very  bulky,  and  the  cost  of  transportation 
plays  a  larger  part  in  determining  their  marketability. 

Irregularities  of  Production  and  Sale. — Most  farm  crops 
mature  during  a  relatively  short  period  of  the  year.  Because 
of  this  there  usually  occurs  a  "peak  load"  in  their  sale,  stor- 
age, transportation,  and  financing.  When  not  too  perishable,  ' 
they  may  be  held  for  months  in  their  natural  state  and  so  be 
consumed  with  more  or  'less  uniformity  throughout  the  year. 
But  the  farmer  often  desires  to  sell  at  once,  sometimes  even 
before  the  harvest.  On  the  other  hand,  but  few  final  con- 
sumers and  but  few  manufacturing  consumers  wish,  or  are 
able,  to  store  and  finance  products  for  their  own  future  use. 

buyers  sent  out  from  Liverpool  and  Manchester  houses;  or  (3)  by 
American  firms  which  have  a  branch  office  in  England. 

".  .  .In  Liverpool,  with  some  exceptions,  the  importer  entrusts  tht, 
disposal  of  his  cotton  to  a  selling  broker,  and  the  spinner  employs  a 
buying  broker.  .  .  .  The  buying  broker  and  the  selling  broker  each 
receive  a  commission  of  one-half  of  one  per  cent  on  the  value  of  the 
cotton.  In  Manchester  the  importers  deal  directly  with  the  spinners,  not 
as  brokers  but  as  merchants." — Melvin  Thomas  Copeland,  The  Cotton 
Manufacturing  Industry  of  the  United  States,  p.  354. 

8  Most  agricultural  products  could  not  be  the  subject  of  extended  com- 
merce at  all  but  for  the  improvements  of  the  past  two  centuries  in 
transportation.  Before  the  eighteenth  century  the  only  articles  carried 
in  international  commerce  were  luxuries  of  great  value,  but  with  im- 
provements in  ocean  transportation  products  grown  near  waterways 
could  be  carried.  It  was  not  until  the  development  of  the  steam  rail- 
way that  products  grown  in  areas  much  removed  from  waterways  could 
be  carried  far.  ".  .  .In  1817  people  were  dying  of  famine  in  Lorraine, 
while  wheat  was  abundant  in  Brittany."  But  the  cost  of  transportation 
was  too  great  to  bring  the  supply  to  Lorraine.  See  Clive  Day,  A 
History  of  Commerce  (2d  ed.,  1917),  pp.  318  ff. 


MARKETING  FARM  PRODUCTS  33 

There  is,  consequently,  need  for  storage  and  financing  facili- 
ties between  the  farmer  and  the  consumer.  The  fact  that"/ 
shipments  to  central  markets  are  largest  following  the  harvest 
complicates  their  transportation;  and  the  financing  of  this 
heavy  crop  movement  during  the  periods  of  greatest  activity 
is  an  annually  recurring  problem  of  national  scope.  Table  I 
illustrates  the  seasonal  nature  of  strawberry  production,  and 
Table  II  shows  the  large  percentage  of  all  grains,  and  of 
wheat  and  corn,  which  country  elevators  handled  during  and 
immediately  following  the  harvests  of  1913  and  1916. 

Closely   connected   with   this   seasonalness   of   agricultural 
marketing  is  the  variation  in  the  amount  and_cm&lity  of  the 
crop  from  year  to  year.    This  tends  to  disorganize^  market 
prices  through  changing  the  conditions  of  supply.     The  varia-'T' 
tion  in  quantity  adds  to  the  difficulties  of  both  storage  and^ 
transportation,  for  in  some  years  these  facilities  are  taxed  be- 
yond their  capacity,  and  at  other  times  they  may  prove  far 
greater  than  the  need.    The  variation  in  quality  complicates  T 
the  problem  of  grading,  and  makes  purchase  and  sale  morer* 
difficult.    This  is  particularly  true  of  raw  materials,  since 
manufacturers  commonly  demand  standardized  materials  with 
particular  characteristics.8 

Again,  there  are  optional  uses  t«  which  the  farm  product  ? 
may  be  put.  In  some  growing  areas  grain  may  be  fed  to 
live  stock  on  the  farm,  sold  to  local  feeders,  or  to  mills ;  fruits 
and  vegetables — particularly  when  not  the  output  of  a  highly 
specialized  section — may  be,  in  varying  degrees,  consumed  by 
the  farmer,  sold  as  fresh  produce  to  the  consumer,  or  bought 
by  the  canning  factory.  This  is  likewise  a  disorganizing 
factor  in  the  market.  Thus  if  the  price  of  corn  is  low  it 
be  used  for  feeding  stock,  whereas  when  the  price  is  high 
may  be  sold  to  dealers.  This  will  affect  the  market  price  of 
corn,  and  ultimately  it  will  decrease  or  increase  the  local  sup- 
ply of  live  stock  and  change  the  demand  for  substitute 
products. 

6  See  pp.  23-27,  93-96  and  396-398. 


34 


PRINCIPLES  OF  MARKETING 


TABLE  I 
Strawberry  Shipping  Seasons  * 


District 

Shipping  Season 

Carloads 
Shipped 

Central   Florida         

Dec.     1-Mar.  31 

152.5 

Northern  Florida                         

Feb.   10-May  15 

378.0 

Southern  Texas    

Mar.    1-May  15 

126.0 

Southern  California       

Mar.    1-Dec.     1 

373.5 

Louisiana                                           .  •  • 

Mar.  15-May  2(T 

1243.0 

Southern   IVIississippi 

Apr.     1-May  20 

68.0 

Northern  Texas     

Apr.     1-May  20 

99.5 

Central    California 

Apr.     1-Aug.  15 

1905.0 

Central  and  Southern  Alabama  
Central  Mississippi     

Apr.    15-May  31 
Apr.    15-May  31 

294.0 
95.5 

North  and  South  Carolina         

Apr.   15-May  31 

967.3 

Northern  Alabama                        • 

Apr.   15—  June    7 

1003 

Central  and  Southern  Arkansas  
Tennessee        

Apr.  25-June     7 
May     1-June     7 

505.7 
1571.5 

Virginia                              

May     1—  June     7 

779.0 

Ozark  region 

May     1-June  20 

7480 

Kentucky    

May  10-June  17 

84.0 

Delaware        

May  15-  June  20 

1374.0 

Southern   Illinois 

May  15-June  2U 

2682 

May  15-June  20 

15693 

Kansas    

May  18-  June  20 

104.8 

Central  Colorado 

May  18-July   15 

41.0 

Oregon  and  Northern  California... 
Washington 

May  18-July    15 
May  18-July   15 

277.8 
3270 

Southern   Indiana    

May  24-  June  25 

103.5 

New  Jersey    

May  24-  June  25 

248.7 

Iowa 

June     1-20 

21.0 

Ohio   

June     1-25  ' 

15.9 

Hudson  Valley,  N.  Y  

June     1-30 

1220 

Western  New  York 

June     1-30 

545 

Michigan 

June     1—  July   15 

321  7 

Connecticut    •  •  

June  15—  July   15 

1050 

Minnesota  and  Wisconsin     

June  15—  July    15 

665 

Oswego  District    N    Y 

June  15—  July    15 

130 

Northern  Colorado 

July   20-Aug    31 

190 

• 

*  U.  S.  Department  of  Agriculture,  Bui.  No.  237,  Strawberry  Supply  and 
Distribution  in  1914,  p.  5. 


MARKETING  FARM  PRODUCTS 


35 


TABLE  II 

Total  purchases  of  all  grains,  and  of  wheat  and  corn  made  in  each  month 

of  the  crop  years  1913-14  and  1916-17  by  all  reporting  elevators 

in  the  14  principal  grain-producing  States* 


All  grains 

Wheat 

Corn 

Ele- 

YOST Etiid 

vators 

Per- 

Per- 

Per- 

Tnnni~Vi 

re- 

cent- 

cent- 

cent- 

111 (Jilt  11 

port- 

Amount 

age 

Amount 

age 

Amount 

age 

ing 

of 

of 

of 

total 

total 

total 

1913-14 

Bushels 

Bushels 

Bushels 

July,    1913  

2,676 

24,568,872 

8.32 

15,344,273 

13.31 

3,629,191 

4.50 

August,  1913... 

2.974 

35,268,911 

11.95 

13,861,517 

12.03 

5,508,553 

6.83 

September,  1913 

3,078 

38,593,881 

13.07 

16,722,794 

14.51 

6,528,426 

8.09 

October,  1913.. 

3,065 

33,257,567 

11.26 

16,418,895 

14.25 

4,491,027 

5.57 

November,  1913 

3,053 

27,327,475 

9.26 

12,666,111 

10.99 

7,021,239 

8.70 

December,  1913 

3,040 

31,613,237 

10.71 

9,355,226 

8.12 

13,980,638 

17.32 

January,  1914.  . 

3,016 

23,688,634 

8.02 

8,031,755 

6.97 

9,254,542 

11.47 

February,  1914. 

2,978 

21,820,223 

7.39 

6,357,750 

5.52 

8,836,632 

10.95 

March,    1914... 

2,951 

18,091,546 

6.13 

5,177,869 

4.49 

6,486,028 

8.04 

April,  1914  .... 

2,787 

9,268,253 

3.14 

3,196,417 

2.77 

2,947,671 

3.65 

May,  1914 

2,767 

16,094,473 

5.45 

4,153,566 

3.60 

6  566,131 

8.14 

June    1914  

2",705 

15,657,178 

5.30 

3,967,004 

3.44 

5,450,760 

6.75 

Total  

35,090 

295,250,250 

100.00 

115,253,177 

100.00 

80,700,838 

100.00 

1916-17 

July,  1916 

3891 

35,259,044 

859 

17,821,678 

1356 

6,719,870 

5.73 

August,  1916... 

4,303 

64,079,288 

15.62 

21  £51  £62 

16.63 

7,974,013 

6.80 

September,  1916 

4,489 

50,606,007 

12.33 

19,041,592 

14.49 

7,641,393 

6.52 

October,  1916.. 

4,525 

45,770,728 

11.16 

19,028,516 

14.48 

4,996,375 

4.26 

November,  1916 

4,428 

44,893,388 

10.94 

13,657,877 

10.39 

15,505,252 

13.23 

December,  1916 

4,338 

31,008,502 

7.56 

7,079,553 

5.39 

15,070,382 

12.85 

January,  1917.  . 

4,390 

40,482,911 

'9.87 

9,600,320 

7.31 

19,253,664 

16.42 

February,  1917. 

4,201 

23,594,163 

5.75 

4,355,027 

3.31 

11,098,262 

9.47 

March,  1917.... 

4,246 

22,981,626 

5.60 

5,992,376 

4.56 

8,585,186 

7.32 

April,  1917  

4,038 

16,228,652 

3.96 

4,910,286 

3.74 

5,506,643 

4.70 

May,  1917  

3,906 

19,026,551 

4.64 

5,065,192 

3.85 

7,623,051 

6.50 

June,    1917  

3,613 

16,343,896 

3.98 

3,016,750 

2.30 

7,264,456 

6.20 

Total  ..     . 

50,368 

410,274,756 

100.00 

131,420,829 

100.00 

117,238,547 

100.00 

*  Report  of  the  Federal  Trade  Commission  on  the  Grain  Trade  (1920)  Vol.  I, 
p.  339. 


36  PRINCIPLES  OF  MARKETING 

The  Farmer  and  Marketing. — Other  important  consider- 
ations affecting  the  marketing  of  farm  products  arise  out  of 
the  characteristics  of  farming  as  a  business  and  of  farmers 
as  a  class.  The  grower  labors  under  several  distinct  disad- 
vantages in  his  attempts  to  market.  He  has  frequently  neither 
the  time,  the  ability,  nor  the  knowledge  to_  market  success- 
fully. He  is  likely  to  be  particularly  busy  caring  for  one  crop — 
plowing,  planting,  harvesting— just  when  it  may  be  the  most 
opportune  time  to  market  another.  And  in  the  winter  seasons, 
when  the  grower  has  time  to  market,  country  roads  are  often 
impassable-  Many  farmers  have  slight  knowledge  of  market-, 
ing  methods  and  of  market  conditions,  and  possess  little  or  no 
knowledge  of  the  jprice  of  their  product  in  other  than  their  own 
local  market.  They  have  even  less  knowledge  of  the  broad 
market  influences  which  determine  prices.  There  is  often  the 
greatest  ignorance  of  the  type  of  product  which  consumers  are 
most  willing  to  purchase.  Furthermore,  the  operations  of  the 
average  farm  are  on  too  small  a  scale  to  warrant  giving  much 
time  to  marketing,  or  carrying  marketing  activities  very  far 
toward  the  final  market  for  which  the  products  are  grown. 

To  meet  conditions  such  as  these,  cooperation  has  devel- 
oped. But  here  again  there  is  difficulty — the  American 
farmer  is  highly  individualistic  and  often  does  not  care  to 
cooperate  with  his  neighbors  in  any  marked  degree.  Further- 
more, our  farm  population  is  con^an^ly^sjiifting  and  changing: 
farm  owners  go  to  town  or  city,  and  tenants  continually  change 
from  farm  to  farm  or  community  to  community.  And  even 
in  the  same  community  there  are  often  different^j^ces  who 
feel  that  they  have  little  in  common.  Such  conditions  fre- 
quently prove  effective  barriers  to  cooperation  for  the  solution 
of  the  problems  of  the  agricultural  community*  More  re- 
cently, however,  the  great  success  of  some  farmers'  coopera- 
tive selling  organizations  has  given  stimulus  to  the  movement 
and  in  large  sections  of  the  country  the  obstacles  to  coopera- 
tion appear  to  be  rapidly  disappearing.7 

7  See  Chap.  XIII. 


MARKETING  FARM  PRODUCTS  37 

Difficulties  with  Finance  and  Labor. — Insufficient  funds 
and  lack  of  credit  may  hinder  the  farmer  in  his  marketing 
just  as  they  often  hamper  his  productive  activities.  The  price 
of  farm  products  is  sometimes  lower  just  at  the  harvest  than 
long  time  market  conditions  warrant.  The  farmer  who  can 
hold  his  crop  may  do  better  later  in  the  year.8  But  many 
farmers  find  it  impossible  to  do  this.  They  need  the  cash  with 
which  to  pay  bills  incurred  in  making  essential  purchases,  or 
their  storage  facilities  are  inadequate.  These  difficulties  have 
been  peculiarly  prevalent  in  some  parts  of  the  cotton  belt 
where  the  small  farmers  and  tenants  are  notoriously  poor. 
Dependent  upon  local  merchants  for  credit,  they  have  mort- 
gaged their  crops  to  buy  the  necessities  of  life  and  the  essen- 
tials of  production.  The  merchants  in  turn  have  forced  the 
early  sale  of  the  products  to  themselves  and  have  reaped  what 
benefits  there  were  to  be  derived  from  holding  the  crop.  Again 
the  farmer  may  be  able  to  sell  his  fruit  or  vegetables  at  a 
better  price  if  they  are  properly  sorted,  graded,  and  packed  at 
the  farm,  and  here  likewise  the  lack  of  funds  may  occasionally  / 
prove  to  be  the  stumbling  block  which  forces  him  to  pass  this 
work  on  to  the  middleman. 

The  lack  of  labor  may  also  affect  the  market  problem.  In 
the  spring  of  the  year,  just  when  the  plowing  must  be  done, 
the  price  of  grain  frequently  rises;  or  again  the  farmer  may 
be  unable  to  harvest,  sort  or  grade  his  products  because  of 
labor  shortage.  This  difficulty  is  due  in  part  to  the  lack  of 
funds,  and  in  part  to  the  characteristics  of  the  farm  laborer's 
job;  namely,  the  seasonalness  of  demand,  the  social  status, 
long  hours,  poor  living  conditions.  Whatever  the  cause,  the 
lack  of  a  sufficient  supply  of  suitable  labor  is  often  the  source 
of  very  real  difficulty. 

&This  appears  to  be  the  situation  with  many  crops.  For  those  in 
which  future  trading  is  carried  on  extensively,  as  wheat,  corn,  oats,  and 
cotton,  it  is  apparently  less  true.  See  J.  E.  Pope,  "Can  the  Farmer 
Realize  Higher  Prices  for  His  Crops  by  Holding  Them?"  Quarterly  Jour- 
nal oj  Economics,  Vol.  XXX,  No.  4  (Aug.,  1916),  pp.  805-831. 


38  PRINCIPLES  OF  MARKETING 

Demand  Creation  and  the  Agricultural  Market.— The  dis- 
cussion in  Chapter  I  indicated  that  there  are  two  large  aspects 
of  marketing:  the  buying  and  selling  of  products,  and  their 
physical  distribution.  In  the  exchange  of  manufactured  prod- 
ucts much  effort  is  devoted  to  selling.  This  is  particularly 
true  with  products  used  by  the  ultimate  consumer,  in  the 
sale  of  which  demand  creation  is  a  predominant  problem.  But 
in  the  sale  of  agricultural  products  there  has  been  less  attempt 
to  influence  demand.  The  resources  of  the_ayexag£-Iarmer  are 
too  limited  and  his  total  production  too  small  to  warrant  it. 
Only  in  the  case  oT~c!3llmi^c[itres"like  citrus  fruits,  raisins, 
apples,  cranberries,  and  milk,  which  are  sold  to  ultimate  con- 
sumers, has  much  effort  been  made  to  influence  demand,  and 
then  only  through  associated  efforts.  The  great  majority  of 
agricultural  products  are  raw  materials  for  manufacture — 
products  bought  largely  on  a  basis  of  specification  or  grade — 
in  the  sale  of  which  demand  creation  plays  no  part.  These 
products  are  in  the  nature  of  necessities,  a  somewhat  limited 
but  variable  supply  of  which  is  called  upon  to  meet  a  com- 
paratively inelastic  demand.  It  follows  that  any  sales  effort 
which  is  made  is  usually  an  effort  of  the  middlemen  who 
handle  the  merchandise  to  sell  their  service  to  producers  and 
users,  rather  than  an  effort  to  create  a  demand  for  the  product 
itself.9 

A  distinction  is  sometimes  made  between  agricultural  prod- 
ucts as  goods  that  are  "bought"  and  manufactured  goods  as 
those  which  must  be  "sold."  But  this  is  not  an  accurate 
distinction.  If  we  can  generalize  at  all  on  this  point,  it  is  to 
distinguish  between  such  goods  as  raw  materials  which  are 
bought  mainly  after  careful  inspection  by  the  buyer,  and  on 
his  specification,  or  on  a  basis  of  recognized  standard  grades, 

9  It  should  not  be  inferred  that  the  farmer  need  not  attempt  to  find 
the  best  market  for  his  product.  That  is  an  activity  in  which  many 
farmers  could  well  engage.  Seeking  the  market  in  which  the  best  price 
is  offered  or  prevails  is  a  different  problem  from  seeking  to  create  or 
to  influence  such  a  market  through  efforts  at  demand  creation. 


MARKETING  FARM  PRODUCTS  39 

and  products  in  the  exchange  of  which  no  generally  recognized 
standards  of  choice  exist,  and  in  the  purchase  of  which  influ- 
ence may  be  effectively  brought  to  bear  by  the  seller.  In 
considering  consumption  goods  it  was  shown  that  a  distinction 
is  sometimes -made  between  specialties  and  staples.  A  distinc- 
tion between  manufactures  and  farm  products  is  sometimes 
made  on  this  basis;  and  the  extent  to  which  manufactured 
products  are  specialties  and  farm  products  staples  makes  this 
distinction  fairly  accurate.  But  it  is  not  fundamental.  For 
in  the  case  of  agricultural  commodities  which  are  in  the  nature 
of  semi-luxuries,  which  have  never  been  largely  consumed,  or 
which  come  from  new  production  areas,  we  find  that  endeavors 
have  been  made  to  create  demand.  The  advertising  of  Cali- 
fornia and  Florida  citrus  fruits  and  raisins,  apples  from  the 
Northwest,  and  cherries  from  Washington,  affords  examples  in 
point;  so  do  advertised  sales  of  blooded  stock  and  poultry. 

The  Concentration  of  Farm  Products. — The  manufactur- 
ing plant  which  utilizes  agricultural  products  as  raw  material 
can  usually  work  effectively  only  when  using  the  combined 
product  of  many  farm's.  And  the  densely  populated  areas  of 
the  world  must,  likewise,  draw  food  stuffs  from  wide  areas. 
To  make  this  possible  products  must  be  concentrated  in  these 
areas,  as  well  as  at  manufacturing  plants,  such  as  the  local 
grist  mill  and  great  milling  plant,  the  sugar  mill,  the  cotton 
factory,  the  local  butcher  shop  and  the  great  meat  packing  es- 
tablishment. If  factories  were  generally  small,  drawing  their 
raw  materials  from  nearby  and  producing  for  a  limited  local 
market,  and  if  population  were  evenly  distributed  and  willing 
to  consume  local  products,  this  would  not  be  difficult.  The 
farmers  could  haul  the  raw  material  to  the  factory  and  the 
finished  product  could.be  easily  distributed  to  nearby  consum- 
ers. Food  stuffs,  likewise,  would  be  locally  grown  and  con- 
sumed. But  these  are  not  the  facts  which  condition  modern 
marketing.  People  congregate  in  large  cities,  industries 
localize,  and  manufacture  is  carried  on  upon  a  large  scale. 
For  physical  and  economic  reasons  some  farm  products  can 


40  PRINCIPLES  OF  MARKETING 

be  grown  only  in  certain  districts,  which  often  cover  wide 
areas,  far  from  the  centers  of  manufacture  and  consumption. 
Because  of  the  extent  of  agricultural  areas  and  their  remote- 
ness from  the  consumption  points,  it  is  impossible  for  most 
farmers  to  exchange  directly  with  the  consumer  or  even  with 
retail  merchants,  mills  and  factories.10  Thus  New  England's 
flour  is  milled  from  wheat  grown  largely  west  of  the  Great 
Lakes,  its  citrus  fruits  are  grown  in  California  and  Florida, 
the  source  of  the  cotton  for  its  mills  is  in  the  southern  states, 
the  islands  of  the  sea,  and  Egypt,  and  many  of  its  meat 
animals  graze  upon  western  farms  and  ranches.11 

The  Localization  of  Manufacture. — The  manufacture  of 
but  few  products  is  evenly  distributed  among  the  producing 
areas  from  which  the  raw  materials  are  drawn.  Manufacture 
tends  rather  to  localization  in  certain  districts,;  and  as  a  general 
rule  an  efficient  plant  can  not  only  produce  far  more  than  the 
local  market  consumes,  but  is  also  likely  to  utilize  more  of 
some  raw  materials  than  nearby  areas  can  supply.  Extreme 
illustrations  are  found  in  the  localization  of  meat  packing 
about  Chicago,  the  Twin  Cities,  Kansas  City,  and  Omaha;  and 

10  See  Map  I,  p.  47. 

11  "The   territory   made   tributary  to  the   demand   of  the  perishable 
produce  market  of  the  New  York  zone  reaches  from  ocean  to  ocean. 
It  even  extends  overseas  to  Belgium  and  Germany  for  Brussels  sprouts, 
chard,    endive,    cabbages;    to   Mediterranean   ports   for   specialties;    to 
Hawaii  for  pineapples;  to  Great  Britain  for  potatoes;  and  it  extends 
south  to   Central   America   and   the   West   Indies   for   bananas,   citrus 
fruits,  and  a  few  tropical  specialties.     A  considerable  supply  of  eggs 
comes  from  China.    Within  the  continental  bounds  of  North  America, 
New  York  reaches  out  to  the  State  of  Sonora  in  northwest  Mexico  for 
tomatoes;  to  southeast  Texas  and  southern  Florida  for  its  early  lettuce; 
to  Florida  and  Louisiana  for  strawberries,  new  potatoes,  and  onions; 
to  Georgia  and  Michigan  for  peaches,  and  Colorado  and  California  for 
melons;    to    Oregon    and   Washington    for   apples;    it    reaches   to   the 
northern  confines  of  Maine  for  its  Aroostook  potatoes,  to  Minnesota 
for  the  Red  River  potatoes,  and  to  the  Provinces  of  Canada  for  apples, 
cabbages  and  onions,  butter  and  eggs." — Report  of  the  Federal  Trade 
Commission  on  the   Wholesale   Marketing   of  Food    (June   30,   1919), 
p.  201. 


MARKETING  FARM  PRODUCTS 


41 


TABLE  III 

Number  of  States  interested  in  the  markets  of  16  cities  for 
specified  commodities  * 

[The  figures  given  for  the  different  markets  were  furnished  by  the 
Department  of  Agriculture.] 


Cities 

|l 

fe  ° 
f>  ft 

GO 

li 

cc  ft 

Cabbages 

Tomatoes 

ll 

jj 
13, 
ft 

Peaches 

II 

Baltimore 

States 
15 

States 
3 

States 
11 

States 
8 

States 
9 

States 
11 

States 
-10 

States 
5 

Birmingham  .... 
Chicago 

19 
41 

6 
21 

16 
23 

1 
21 

5 
19 

21 

32 

4 
38 

1 
17 

Cincinnati 

31 

13 

17 

11 

17 

22 

19 

7 

Columbus   

23 

10 

10 

6 

6 

16 

10 

7 

Denver 

15 

8 

3 

8 

4 

7 

8 

2 

Kansas  City  .... 
Minneapolis    .... 
New  York   
Omaha  

29 
29 
23 
27 

10 
12 
8 
14 

14 
12 
16 
13 

4 
11 
13 

8 

9 
12 
15 

8 

14 

20 
24 
12 

12 
13 
15 
10 

7 
12 
12 
4 

Philadelphia    
Pittsburgh 

23 
32 

4 
15 

15 

27 

6 
20 

8 
25 

14 
23 

10 
21 

9 
17 

Spokane   

4 

2 

2 

St.  Louis  

3-1 

8 

19 

13 

10 

22 

15 

2 

St.  Paul  

22 

7 

9 

9 

9 

19 

10 

8 

Washington    

14 

4 

8 

7 

11 

10 

9 

3 

Average 

2381 

893 

1331 

912 

1056 

1681 

1212 

706 

*  From   the   Report   of   the   Federal   Trade    Commission   on    the   Wholesale 
Marketing  of  Food  (1920),  p.  48. 

in  the  concentration  of  the  flour  milling  industry  at  the  middle 
western  termini  of  railroads  and  waterways  leading  east  from 
the  great  wheat  producing  areas.  The  cotton  industry,  which 
is  localized  to  a  high  degree  in  New  England,  affords  another 
example.12  There  are,  of  course,  important  exceptions.13  Sugar 
beets  are  grown  near  the  factory,  although  a  short  rail  haul/ 
is  frequently  involved.  Canneries  draw  their  fruits  and  vege- 

12  See  U.  S.  Census  Reports,  Twelfth  Census  (1900),  Vol.  VII,  pp.  ccxiii 
ff.,  for  one  of  the  best  discussions  of  the  causes  for  the  localization  of 
industry,  as  well  as  for  further  examples  of  localized  industry. 

13  See  pp.  91-93. 


42  PRINCIPLES  OF  MARKETING 

tables  from  the  surrounding  growers.  There  is  also  a  large 
volume  of  local  slaughtering  of  meat  animals,  and  butter  and 
cheese  are  commonly  made  in  local  creameries  and  cheese  fac- 
tories. Even  in  such  cases,  however,  products  must  be  col- 
lected from  a  large  number  of  individual  growers  "in  order  to 
secure  a  sufficient  supply. 

Dispersion. — It  appears,  then,  that  products  of  the  farm 
used  as  the  raw  materials  of  manufacture,  as  well  as  those 
consumed  in  their  original  state,  must  often  be  brought  to- 
gether from  wide  areas.  Then,  the  consumption  goods  and  the 
manufactured  articles  into  which  the  raw  materials  have  been 
converted  must  be  dispersed  to  consuming  areas.  These  con- 
suming areas  are  sometimes  fully  as  distant  from  the  manu- 
facturing plant  or  central  market  as  the  producing  areas,  and 
often  more  widely  separated. 

II 

Bearing  in  mind  the  foregoing  characteristics  of  farm  prod- 
ucts— the  need  for  concentration  preceding  fina]  Histrihytinn, 
the  peculiar  characteristics  of  farm  products,  the  rather_low 
efficiency  of  the  average  farmer  as  a  trader,  and  the  fre- 
quent absence  of  demand  creation  as  a  determining  factor  in 
exchange — the  actual  methods  of  marketing  farm  products 
will  next  be  considered. 

There  is  no  one  method  of  marketing  farm  products.  Even 
a  single  producer  or  buyer  may  utilize  several  methods  of 
selling  or  purchasing.14  There  are,  nevertheless,  certain  gen- 

14  "Of  the  138  vegetable  growers  in  the  United  States  who  answered 
the  author's  query  as  to  whether  they  sold  to  local  purchasers,  cash- 
buying  jobbers,  retailers,  or  consumers,  39  answered  that  they  sold  to 
wholesalers  on  consignment,  30  to  cash-buying  jobbers,  31  to  local  pur- 
chasers, 51  to  retailers,  and  22  to  consumers.  That  is,  one-half  of  these 
growers  sold  either  to  retailers  or  consumers.  Nor  are  these  growers 
limiting  themselves  to  any  one  of  these  five  outlets  for  their  goods. 
Thus,  of  the  138  who  responded,  17  sold  to  all  five,  that  is,  to  whole- 
salers on  consignment,  cash-buying  jobbers,  local  purchasers,  the  retailer 


MARKETING  FARM  PRODUCTS  43 

eral  types  of  distribution,  into  one  or  a  combination  of  which 
most  methods  can  be  placed. 

Methods  Open  to  the  Farmer:  (A)  Direct  Sale  to  Con- 
sumer or  Manufacturer. — The  methods  by  which  individual 
farmers  market  their  products  are  numerous.  The  simplest 
is  by  direct  sale  to  consumer  or  manufacturer.  There  are 
three  familiar  types  of  direct  sale:  (1)  sale  at  the  residence 
or  plant  of  the  purchaser,  or  at  the  farm  of  the  seller,  (2)  on 
the  public  market,  and  (3)  through  ike  medium  of  the  parcel 
post  or  express  companies  when  these  act  as  agents  of  assem- 
bly and  transportation. 

The  huckster. — The  familiar  huckster  selling  his  products 
from  door  to  door  is  an  important  example  of  direct  sale  to 
the  consumer.  But  not  all  hucksters  are  producers.  Many 
purchase  all  or  a  part  of  their  produce  from  auction  com- 
panies, commission  men,  and  other  dealers,  as  well  as  directly 
from  farmers.  Huckster  sales  are  usually  for  cash  and  deliv- 
ery is  made  at  once.  When  carried  on  by  the  grower  him- 
self, huckstering  takes  much  time  from  the  work  of  produc- 
tion, as  sales  are  made  in  small  quantities  and  relatively 
slowly.  Consequently,  this  method  is  not  likely  to  be  used 
by  growers  pressed  for  time,  unless  they  are  selling  a  clientele 
willing  to  pay  enough,  because  of  the  special  nature  of  the 
product,  to  offset  the  time  lost  to  production. 

A  closely  related  type  of  direct  sale  is  found  in  the  case 
of  the  farmer  or  his  wife  who  has  a  few  customers  in  the 
neighboring  town  to  whom  produce  is  delivered  at  intervals. 
Poultry,  eggs,  and  butter  are  frequently  sold  in  this  way. 

and  the  consumer.  Seven  more  'sold  to  wholesalers,  cash-buying  job- 
bers, local  purchasers  and  retailers.  Others  sold  to  three  or  more  of 
these. 

"Nor  are  the  growers  alone  the  only  class  of  business  men  who 
are  organizing  their  purchasing  and  selling  methods.  The  wholesaler  is 
turning  jobber.  He  is  sending  his  automobile  direct  to  the  farm  and 
is  selling  direct  to  the  retailer.  The  jobber  is  buying  direct  from  the 
farm  and  is  selling  direct  to  the  retailer."— Clyde  L.  King,  American 
Economic  Review,  Supplement,  Vol.  V,  No.  1  (Mar.,  1915),  p.  155. 


44  PRINCIPLES  OF  MARKETING 

Direct  sales  to  manufacturers. — Sales  of  raw  materials  by 
growers  to  manufacturers  are  made  in  a  number  of  ways  with 
different  crops,  and  even  for  the  same  crop.  They  are  often 
made  in  advance  of  the  harvest,  sometimes  long  before,  and 
the  selling  price  is  frequently  stipulated  in  advance.  This  as- 
sures the  farmer  a  definite  price  when  the  harvest  is  over. 
But  though  he  is  insured  .against  a  very  low  return,  it  is  the 
general  impression  that  over  a  period  of  years  the  returns 
average  lower  than  the  average  of  the  market  for  the  same 
period.  This  is  not  necessarily  a  criticism  of  the  manufac- 
turer. It  is  evident  that  one  who  sells  a  finished  product  on 
a  competitive  market  must  protect  himself  from  guaranteeing 
what  may  prove  to  be  much  more  than  the  market  price  for 
his  materials.  Otherwise,  if  the  cost .  of  his  raw  materials 
proves  to  be  far  above  the  prevailing  market  he  will  find 
that  competitors  who  buy  at  the  market  price  can  far  un- 
derbid him  in  the  sale  of  his  product. 

A  common  method  of  direct  sale  to  manufacturers  is  found 
in  the  case  of  farmers  who  haul  their  product  to  local  mills 
or  factories  and  there  dispose  of  them  at  the  prevailing  market 
price./  This  is  common  in  the  sale  of  wheat,  corn,  and  other 
cereals,  and  of  fruit  and  vegetables  sold  to  canning  factories. 
Sales  to  distant  manufacturers  are  often  made  through  rep- 
resentatives of  the  manufacturers  who  come  directly  to  .the 
farm,  or  station  themselves  in  the  town  to  which  the  grower 
hauls  his  product.  Thus  some  cotton  is  sold  by  large  planters 
to  mill  buyers  who  go  about  from  place  to  place  seeking  the 
special  kind  of  cotton  their  mill  uses,  and  some  flour  mills 
have  established  their  own  elevators  in  regions  where  the 
quality  of  grain  they  use  is  grown.  Wool  and  tobacco,  like- 
wise, are  sometimes  sold  in  this  way.  In  other  cases,  large 
growers  themselves  approach  the  manufacturer  and  attend  to 
the  sale  as  well  as  to  the  shipment  of  their  product. 

Public  markets;  parcel  post  and  express  sales. — Public 
market  places  are  provided  sometimes  by  private  initiative 


MARKETING  FARM  PRODUCTS  45 

and  sometimes  at  public  expense.  They  afford  an  opportunity 
for  direct  selling  of  some  importance.  But  by  no  means  all 
who  sell  on  the  public  market  are  growers;  in  fact  retail  deal- 
ers often  predominate.  Public  markets,  although  relatively 
unimportant,  have  awakened  much  interest  during  the  recent 
period  of  high  prices,  and  appear  to  be  growing  in  importance. 

Sales  ^delivered  through  the  parcel  post  and  the  express 
company  are  difficult  to  classify,  for  other  agencies  are  con- 
cerned to  so  large  an  extent  that  it  is  hard  to  decide  whether 
they  should  be  classed  as  direct  or  indirect.  Even  in  making 
the  sale  other  agencies  intervene.  Thus  in  some  states  a  state 
market  agency  endeavors  to  bring  producer  and  consumer  to- 
gether through  the  use  of  printed  bulletins;  the  express  com- 
panies and  the  post  office  department  also  assist  in  making 
the  actual  sale  through  bringing  consumer  demands  and  pro- 
ducer supplies  together. 

Direct  sale  of  fruits,  vegetables,  and  dairy  products. — The  ' 
direct  sale  of  fruits,  vegetables,  and  dairy  products  to  ultimate 
consumers  seems  to  be  less  prevalent  than  the  direct  sale  of 
raw  materials  to  mills  and  factories.  The  reasons  are  not 
far  to  seek.  A  grower  can  -haul  a  load  of  wheat  to  the  local 
mill,  sell  and  unload  it,  and  return  in  a  relatively  short  time ; 
but  if  he  tries  to  sell  a  load  of  apples  to  final  consumers, 
he  must  peddle  in  small  lots  from  house  to  house,  and  so 
put  in  a  considerable  part  of  his  day  in  marketing.  Most 
farmers  are  unwilling  or  unable  to  spend  so  much  time  in  this 
way;  they  prefer  to  sell  quickly  in  large  lots  to  middlemen, 
such  as  the  jobber,  local  shipper,  or  retailer;  and  then  to 
return  to  the  work  of  the  farm. 

Again,  fruits,  vegetables,  and  dairy  products  are  often  grown 
far  from  the  ultimate  market.  The  great  consuming  areas  of 
California  fruits,  Colorado  cantaloupes,  and  Latin  American 
bananas,  are  in  populous  districts  far  removed  from  the  pro- 
ducing areas.  The  fresh  vegetables  consumed  in  our  larger  cities 
are  grown  in  a  wide  area  surrounding  the  city  and  in  growing 


46  PRINCIPLES  OF  MARKETING 

regions  not  geographically  tributary.  It  is  physically  impos- 
sible for  the  average  grower  to  haul  his  products  to  such 
markets  and  practically  impossible  for  him  to  establish  satis- 
factory business  connections  for  their  sale  there.  So  not  only 
must  his  goods  be  shipped  by  some  general  transportation 
agency,  but  he  is  likely  to  find  it  easier  to  turn  the  whole 
operation,  including  the  sale,  over  to  a  marketing  specialist.15 
Furthermore,  a  product  which  is  consumed  out  of  season, 
either  directly  or  by  mills  and  factories,  can  often  best  be 
stored  by  independent  agencies  who  have  the  proper  facili- 
ties, together  with  the  requisite  financial  resources,  and  who 
are  in  close  and  constant  touch  with  the  market. 

Methods  Open  to  the  Farmer:  (B)  Local  Middlemen. — 
Although  farm  products  in  large  volume  are  handled  through 
direct  sales  by  the  grower  to  manufacturers  and  final  con- 
sumers, the  greatest  volume  of  business  is  carried  on  through 
one  or  more  independent  intermediaries.  There  are  five  im- 
portant classes  of  these  intermediaries  who  buy  in  the  local 
market:  (1)  the  retail  store;  (2)  the  buyer  who  travels  about 
from  farm  to  farm  either  on  his  own  account  or  as  the  repre- 
sentative of  a  mill,  factory,  or  central  market  middleman; 
(3)  the  local  buyer  with  a  definite  place  of  business  to  which 
growers  bring  their  products  for  sale;  (4)  the  producers'  co- 
operative selling  association;  and  (5)  the  middleman  located 
in  an  outside  market.16 

The  second  and  third  methods  are  sometimes  engaged  in  by 

15  The  development  of  better  roads  and  the  use  of  the  motor  truck 
will  bring  a  much  wider  area  into  contact  with  a  given  consumer  mar- 
ket, but  this  will  modify  this  statement  only  as  it  relates  to  products 
grown  in  the  general  vicinity.  Even  here  the  motor  transportation  may 
be  taken  over,  as  it  is  now  in  many  instances,  by  functionalized  agencies. 

"Another  local  market  middleman  should  be  mentioned,  who  while 
handling  but  little  of  the  total  volume  of  the  country's  agricultural 
products  further  illustrates  the  possibilities  of  specialization.  He  is  the 
general  consignee,  or  forwarder,  who  "stands  between  the  individual 
shipper  in  the  countiy  and  the  commission  man  in  the  large  cities 


47 


48  PRINCIPLES  OF  MARKETING 

the  same  individual.  The  methods,  however,  are  unlike,  as 
they  involve  a  somewhat  different  distribution  of  functions., 
Furthermore,  the  middleman  with  a  definite  place  of  busi- 
ness to  which  the  growers  bring  their  products  is  usually  an 
evidence  of  an  advanced  stage  in  marketing. 

(1)  Sales  to  retail  stores. — Great  quantities  of  fruit,  vege- 
tables, butter,  and  eggs  are  sold  directly  from  the  farm  to 
retailers.  Some  growers  have  a  regular  clientele  of  retail 
dealers  to  whom  they  sell.  It  is  more  convenient  for  the 
farmer  to  sell  to  retail  stores  than  it  is  to  huckster  his  prod- 
uct, for  although  he  may  receive  less  money  for  it,  less  time 
is  consumed  and  less  trouble  is  involved.  Local  hotels,  res- 
taurants, and  delicatessens  offer  a  similar  attraction  to  the 
grower.  To  the  retailer  the  main  advantage  of  this  scheme 
is  that  it  assures  him  a  supply  of  fresh  fruits  and  vegetables 
in  season.  But  there  are  important  difficulties  attending  it. 
He  may  have  to  buy  from  several  growers  to  have  a  sufficient 
quantity  and  variety  of  products  for  his  trade.  This  increases 
the  time  and  effort  he  must  devote  to  buying.  He  must  usu- 
ally pay  cash  to  the  grower,  whereas  he  can  get  credit  from 
the  jobber.  Again,  the  source  of  supply  is  far  from  depend- 
able; on  any  day  one  or 'more  of  his  growers  may  fail  to  de- 
liver, the  quality  and  quantity  of  local  crops  vary  widely 
from  year  to  year,  and  in  order  to  keep  a  steady  supply 
throughout  the  season  the  retailer  must  deal  with  a  large  num- 
ber of  growers  located  in  widely  separated  parts  of  the  country. 
Many  retailers  meet  this  last  difficulty  through  buying  from 
local  growers  during  their  local  season  and  purchasing  out  of 
season  supplies  through  wholesale  dealers. 

(especially  Chicago).  His  principal  reason  for  existence  is  that  he 
consolidates  the  small  shipments  of  individual  growers  into  car  lots  thus 
obtaining  for  the  shippers  the  benefit  of  lower  freight  rates."  He  deals 
mainly  with  perishable  products  and  makes  his  profit  from  selling  space 
in  cars  at  more  than  the  carload  rate,  yet  lower  than  the  less-than-car- 
load  or  express  rates.  See  L.  D.  H.  Weld,  The  Marketing  of  Farm 
Products  (1915),  pp.  105-107,  and  see  J.  H.  Collins,  The  Country 
Gentleman,  Mar.  13,  1915. 


MARKETING  FARM  PRODUCTS  49 

The  country  general  store. — The  country  general  store  is 
of  great  importance  to  growers  in  some  sections  of  the  coun- 
try. These  ^tores  buy  food  stuffs  for  local  sale  at  retail  and 
raw  materials  for  shipment  to  outside  markets.  This  method 
of  purchase  is,  as  a  rule,  a  sign  of  an  undeveloped  market- 
ing system,  or  of  a  small  local  production  of  the  crops 
marketed  through  the  general  store.  It  is  usually  succeeded 
by  another  type  of  local  agency  as  soon  as  conditions  become 
settled  and  production  increases. 

The  general  store  merchant  purchases  from  his  producer- 
customers  their  butter,  eggs,  fruit,  cotton,  or  other  products. 
Of  these  he  retains  those  which  he  can  best  sell  to  his  local 
trade  and  ships  the  surplus  to  dealers  and  manufacturers  in 
the  central  market.  He  often  pays  for  the  goods  "in  trade,"; 
i.  e.,  he  exchanges  goods  for  goods.  The  fact  that  the  general 
store  both  buys  from  and  sells  to  the  farmer  frequently  renders 
this  method  unsatisfactory  to  both  parties  to  the  exchange. 
When  this  is  done  either  the  retail  trade  or  the  shipping  trade 
of  the  storekeeper  is  usually  more  profitable  than  the  other, 
and  he  is  likely  to  allow  the  less  important  to  suffer  in  order 
that  he  may  keep  the  good  will  of  the  more  important  trade. 
Butter  is  frequently  bought  by  general  stores  at  a  flat  rate  / 
regardless  of  quality,  and  eggs  by  the  dozen,  also  with  no  re-  I 
gard  to  quality.  Apparently  the  dealer  either  does  not  care 
to  take  the  trouble  to  grade  his  purchases,  does  not  know 
how,  or,  more  than  likely,  he  fears  to  lose  the  good  will  of  his 
customers  if  he  pays  more  to  one  than  to  another.17  Eggs  and 
butter  are  often  held  until  there  is  a  suitable  quantity  for 
shipment,  with  unfortunate  results  to  their  quality.  Grain, 
hides,  wool,  cotton,  and  a  few  other  crops  are  bought  to  some 
extent  by  general  stores,  and  although  these  do  not  deteriorate 
so  rapidly  as  do  butter  and  eggs  the  evils  of  poor  grading  and/ 
inadequate  storage  are  present.  Poor  grading  penalizes  those 

17  Of  course,  some  local  stores  do  roughly  grade  the  product  which 
they  buy  and  pay  according  to  grade.  This  practice  is  becoming  more 
general  in  recent  years. 


50  PRINCIPLES  OF  MARKETING 

who  endeavor  to  produce  a  good  product  and  tends,  conse- 
quently, to  discourage  the  improvement  of  production,  to  the 
detriment  of  all  concerned.  Poor  grading  also  makes  further 
inspection  and  grading  necessary  at  a  later  point.  The  wastes 
from  inefficient  storage  are  often  great. 

What  has  been  said  is  not  necessarily  in  disparagement  of 
the  work  of  the  general  merchant.18  A  needed  service  is  per- 
formed in  this  way  at  those  markets  where  the  volume  of 
business  is  too  small  to  warrant  the  presence  of  a  specialized 
country  shipper.  But  as  a  community  becomes  established 
and  its  production  specialized,  specialized  traders  appear  and 
take  over  the  buying  activities  of  the  general  store.  This  may 
be  brought  about  by  the  general  merchant's  giving  up  his  re- 
tail business  and  specializing  in  handling  certain  farm  prod- 
ucts, or  by  his  making  this  part  of  his  business  distinct  from 
his  retail  trade;  or  it  may  come  about  through  the  appearance 
of  independent  buyers  in  the  local  market. 

(2)  Traveling  buyer. — In  the  sale  of  fruits  and  vegetables, 
poultry,  butter,  eggs,  hops,  wool,  cotton,  rice,  and  cattle,  it  is 
common  for  growers  to  sell  to  traveling  buyers  who  go  about 
from  farm  to  farm  or  who  station  themselves  at  a  local  ship- 
ping point  to  meet  the  growers  as  they  bring  their  produce 
to  town.  Some  of  these  buyers  are  independent  dealers ;  oth-  I 
ers  are  the  representatives  of  central  market  dealers  or  off 
manufacturers.  In  some  fruit  and  vegetable  districts  buyers  go 
about  in  their  wagons  buying  fruit,  vegetables,  butter,  poultry, 
and  eggs,  which  they  carry  to  the  city  retailers  and  jobbers. 
Cotton  is  sold  to  buyers  representing  export  houses,  brokers, 
and  mills,  who  purchase  directly  from  the  growers  at  local 
markets,  warehouses,  steamboat  landings,  and  railroad  sta- 
tions, as  well  as  at  the  farm  and  plantation.  Where  the  rais- 
ing of  live  stock  is  a  secondary  industry  local  buyers  some- 
times go  from  farm  to  farm  purchasing  stock  from  individual 
growers  and  combining  these  in  carload  lots  for  shipment  to 
central  markets. 

18  For  a  further  discussion  of  the  country  general  store  see  pp.  186-187. 


Scoop 

Country 

Country 

1 

Local 
Feeder 

Sho 

r  eler 

Mill 

1— 

Elevator 

J 

> 

Track 
Buyer 

Large 

-<—           |          —  > 

Broker 

Market 

1 

•Jobber 

Other 
Mf'g's 

Mill 

Retail 
Store 

Feed 
Mill 

1 

Consumer 


DIAGRAM  III. — Marketing  Grain  at  Country  Points'. 

The  purpose  of  this  diagram  is  to  list  the  important  agencies  handling 
grain  and  grain  products  and,  in  so  far  as  it  is  possible  by  means  of  a 
diagram,  to  show  their  natural  relationship  to  each  other  and  to  the 
producer  and  Consumer.  The  width  of  the  line  leading  to  and  from 
each  agency  indicates  in  a  general  way  the  comparative  volume  of  trade 
passing  through  this  channel,  the  arrow  indicating  the  direction  of 
the  movement.  Commercial  intercourse  between  coordinating  agencies 
is  indicated  by  cross  lines.  In  some  instances  transactions  may  take 

51 


52  PRINCIPLES  OF  MARKETING 

(3)  Local  buyer. — The  local  grain  elevator  is  the  most 
common  examrjh^ofthesrje^^  buyer  with  an  estab- 

lished place  of  business  to  which  the  growers  haul  their  prod- 
uct for  sale.  The  owner  of  the  elevator  usually  purchases? 
grain  from  the  farmers  in  bulk,  grades  it  roughly  as  a  basis; 
for  payment,  holds  it  in  his  elevator  until  his  judgment  dic- 
tates shipment -to  the  central  market,  and  ships  in  carload 
lots.19  Sometimes,  especially  with  grain  of  low  grade  or  at 
times  when  the  market  is  disorganized,  business  is  done  on  a 
commission  basis. 

"At  the  present  time  the  primary  functions  of  country  elevators 
are  two  in  number,  and  in  the  order  of  importance  they  are,  first, 
the  merchandising"  of  grain,  and,  second,  the  warehousing  of  grain. 
Minor  functions  are,  the  elevating  of  grain  for  farmers  and  others, 
the  cleaning  and  conditioning  of  grain  either  for  the  elevator's  own 
account  or  for  others,  the  handling  of  side  lines,  etc.  .  .  . 

"In  performing  its  various  functions,  the  elevator  becomes  a 
very  important  factor  in  the  marketing  of  grain.  Most  of  the 
grain  marketed  at  country  points  is  bought  by  the  elevators  di- 
rectly from  the  farmers  for  the  purpose  of  resale.  If,  however, 
the  farmer  does  not  care  to  sell  his  grain  immediately  after  harvest, 
he  may  store  it  in  the  elevator,*  for  which  service  a  fee  is  usually 
charged.  In  some  cases  the  farmer  may  decide  that  he  will  ship 
his  grain  himself.  In  such  a  case  the  elevator  perhaps  elevates 
the  grain  and  loads  it  into  the  car.  Or,  again,  if  the  grain  re- 
ceived by  an  elevator  either  for  its  own  account  or  for  that  of 
farmers,  contains  an  admixture  of  foreign  matter  the  elevator,  if 

"  During  years  when  there  is  a  shortage  of  cars  this  is  a  very  risky 

undertaking.     See,  however,  the  discussion  of  hedging  on  pp.  362-372. 

*"Some    elevators   however   refuse   to    accept   grain   for   storage. "- 

place  between  agencies  in  the  reverse  order  in  which  they  are  listed, 
thus  bringing  about  what  appears  from  the  diagram  to  be  a  backward 
movement.  Such  transactions,  however,  are  infrequent  and  do  not  in- 
fluence the  general  direction  of  the  movement  to  any  great  extent. 
The  diagram  is  not  intended  to  show  any  precise  or  sharply  denned 
routes  traveled  by  grain  in  passing  through  the  channels  of  trade  from 
producer  to  consumer,  nor  is  it  intended  to  show  the  relative  merit 
or  value  of  the  service  contributed  by  the  several  agencies  to  the  pres- 
ent system  of  grain  marketing. t 

fG.  K.  Livingston  and  K.  B.  Sopds,  Marketing  Grain,  at  Country  Points, 
U.  S.  Department  of  Agriculture,  Bui.  No.  558  (1917),  p.  13. 


MARKETING  FARM  PRODUCTS  53 

it  is  equipped  to  do  so,  may  clean  the  grain  thus  improving  its 
merchantability. 

"In  addition  to  handling  grain,  either  as  a  merchandiser  or  ware- 
houseman, many  country  elevators,  and  to  a  lesser  extent  ware- 
houses, deal  in  various  other  commodities.  These  commodities, 
especially  coal,  feed  and  flour,  seed,  and  lumber,  are  sold  in  large 
quantities  to  farmers,  and  numerous  elevators  also  buy  and  sell 
wool,  beans,  poultry,  eggs,  potatoes,  etc.  So  far  as  the  elevator  or 
warehouse  is  engaged  in  these  operations,  it  ^cts  as.  an  ordinary 
merchandiser,  and  such  operations  have  no  direct  relation  to  the 
functions  of  the  elevator  in  connection  with  the  grain  busi- 
ness." * 

These  local  elevators  are  sometimes  owned  and  operated 
by  a  local  business  man,  in  which  case  they  are  known  as 
"independents."  They  are  sometimes  units  in  a  "line"  ele- 
vator system  composed  of  a  number  of  local  units,  controlled 
from  headquarters  in  a  central  market,  and  usually  owned  by 
large  grain  dealers.  A  few  are  the  property  of  millers,  and 
others  are  owned  cooperatively  by  growers  themselves. 

In  large  towns  there  are  local  buyers  who  purchase  butter, 
eggs,  and  poultry  from  farmers  and  general  merchants  in 
nearby  towns  for  further  shipment  to  central  markets. 
Throughout  the  northern  potato  region  growers  sell  to  local 
warehousemen  who  buy  and  store  the  potatoes  on  their  own 
account  and  often  sort  and  grade  them.  They  will  also  store 
for  the  grower  and  sell  for  him  on  commission.  Fruit  pack- 
ers buy  from  growers  in  California,  and  wool  is  sometimes 
sold  to  local  buyers. 

As  these  local  dealers  usually  pay  the  grower  cash  for  his 
product,  they  need  rather  large  supplies  of  capital  during  the 
season  when  shipments  are  heavy.  Furthermore,  the  products 
are  frequently  consigned  by  the  dealer  to  central  market  com- 
mission men  or  sold  subject  to  grading  at  the  central  market^ 
Consequently,  but  for  the  financial  arrangements  made  with 
his  customers  in  the  central  market  and  with  the  local  banks, 

*  Report  of  the  Federal  Trade  Commission  on  the  Grain  Trade,  Vol.  I, 
Country  Grain  Marketing  (Sept.  15,  1920),  pp.  23-24. 


54  PRINCIPLES  OF  MARKETING 

the  local  buyer  would  need  to  possess  a  large  amount  of 
capital.  But  it  has  become  common  practice  for  the  local 
buyer  to  draw  drafts  on  the  central  market  dealer  for  a 
large  percentage  of  each  shipment,  the  balance  being  sent 
on  after  the  sale  is  complete.  This  shifts  a  large  part  of 
the  burden  of  financing  purchases  at  local  markets  from  the 
local  shipper  to  middlemen  in  the  central  markets. 

(4)  Cooperative  shipping. — Cooperative  shipping  by  asso- 
ciations of  growers  is  becoming  an  important  outlet  for  the 
products  of  many  sections  of  the  country.    Grain,  fruit,  vege- 
tables, dairy  products,  live  stock,  and  other  products  in  large 
volume  are  shipped  through  these  associations.     These  will 
be  discussed  in  Chapter  XIII. 

(5)  Sales  to  middlemen  in  outside  markets. — Sales  made 
directly  to  middlemen  in  outside  markets,  as  well  as  to  dis- 
tant manufacturers,  are  usually  feasible  only  in  the  case  of 
large  producers.     For  in  order  to  utilize  this  method  to  the 
greatest  advantage  the  grower  must  be  able  to  ship  in  car- 
load quantities ;  otherwise  the  freight  cost  will  usually  be  pro- 
hibitive.    The  trouble  involved  in  establishing  business  con- 
tacts with  distant  buyers,  the  fear  of  unfair  treatment,  and 
the  usual  necessity  of  awaiting  returns  until  the  arrival  of 
the  product  at  the  central  market — all  of  these  are  further 
disadvantages  of  direct  shipment  to  central  markets.     Live 
stock  is  frequently  shipped  by  large  growers  to  commission 
men  at  the  stockyards,  and  direct  shipment  by  growers  to 
commission  men  is  common  in  the  sale  of  fruits  and  vegetables. 
Live  poultry  is  sometimes  shipped  to  commission  men  of  the 
produce  market  and  milk  to  city  distributors  and  to  large 
butter  manufacturers — in  each  case  by  fast  freight  or  express. 
A  large  volume  of  cotton  is  consigned  to  factors  for  sale  on 
commission  and  some  is  sold  directly  to  mills. 


CHAPTER  IV 
THE  WHOLESALING  OF  FARM  PRODUCTS 

Agricultural  wholesaling  is  the  term  applied  to  the  process 
of  concentration  followed  by  dispersion  and  assembly  which 
is  characteristic  of  agricultural  distribution.1  On  the  one 
hand,  it  reaches  out  to  the  grower,  establishes  business  con- 
nections with  the  farmer  and  the  country  shipper,  and  con- 
centrates products  at  the  central  market;  on  the  other  hand, 
it  reaches  out  to  the  mill,  the  factory,  and  the  retail  store.2 

Establishing  Business  Connections. — To  take  the  product 
of  the  farm  and  transfer  title  to  its  ownership  to  buyers  in 
the  central  market  involves  the  establishment  of  business  con- 
nections between  the  dealers  of  the  central  market  and  the 
growers  or  local  shippers  in  the  country.  This  may  be  ac- 
complished through  personal  solicitation,  correspondence,  ad- 
vertising, telegraph,  and  telephone;  and  the  impetus  to  ex- 
change may  come  from  either  the  seller  or  the  buyer.  In  the 
fruit  district  of  Delaware,  for  example,  representatives  of  the 
dealers  in  the  Philadelphia  wholesale  market  buy  fruit  from 
the  growers'  wagons  at  local  shipping  points;  in  the  Middle 
West  bids  for  grain  are  sent  to  local  buyers  from  day  to  day 
by  mail,  telegraph,  and  telephone.  Again,  on  the  other  hand, 
growers  and  local  shippers  may  consign  their  goods  to  central 
market  dealers,  or  seek  buyers  in  the  central  markets. 

Facilities  of  the  Wholesale  Markets, — In  order  that  ad- 
vantage may  be  taken  of  carload  rates  and  car  storage  privi- 

'See  pp.  2-3,  19,  and  39-42. 

2  It  is  this  process  which  has  been  the  subject  of  so  much  indiscrimi- 
nate attack  in  the  propaganda  against  "middlemen."  The  general  sub- 
ject of  the  elimination  of  middlemen  will  be  discussed  in  Chap.  XIV. 

55 


56  PRINCIPLES  OF  MARKETING 

leges,  farm  crops  are  usually  'shipped  to  central  markets  in 
carload  lots.  Often  a  large  part  of  the  year's  crop  is  sent  in 
during  a  comparatively  short  period  of  time.  In  consequence, 
facilities  must  be  provided  for  handling  car  lots  and  for  stor- 
ing the  crop  until  it  is  wanted.  This  involves  storage,  insur- 
ance against  loss  from  such  casualties  as  fire  and  storm,  and, 
through  hedging,  against  loss  from  price  changes.  Facilities 
must  also  be  provided  for  assorting  produce  into  the  styles 
and  grades  demanded  by  the  trade,3  for  the  division  of  the 
large  lots  in  which  the  products  are  held  into  suitable  quan- 
tities for  further  distribution,  and  for  packing  commodities  for 
further  shipment.  Furthermore,  there  is  need  for  a  market 
news  service,  as  well  as  for  financial  and  credit  facilities. 
These  demands  of  the  market  have  brought  into  being  a  mul- 
titude of  specialists  who  are  directly  or  indirectly  connected 
with  the  wholesale  market. 

"These  central  markets  are  equipped  with  large  terminal  ele- 
vators and  warehouses,  exchanges,  auction  rooms,  livestock  yards, 
rail  and  water  transportation  facilities,  inspection  rooms,  banking 
facilities,  and  all  equipment  needed  for  the  storage,  preparation, 
handling,  purchase  and  sale,  insurance,  shipment  and  financing  of 
large  quantities  of  farm  products.  Commission  men,  brokers, 
auctioneers,  wholesale  dealers  or  jobbers,  central  distributors,  con- 
tractors, exporters,  importers,  speculators,  elevator  and  warehouse- 
men, bankers,  insurance  men,  ship  brokers,  inspectors,  weighers, 
freight  forwarders*,  trucking  agencies  and  other  commercial  inter- 
ests are  engaged  in  the  wholesale  trade  which  is  conducted  in  these 
markets.  Many  of  them  are,  furthermore,  equipped  with  -numer- 
ous retail  establishments  and  with  flour  mills,  cotton  or  woolen 
mills,  malt  houses,  meat  packing  plants,  tobacco  factories,  or  other 
consumers  of  farm  products  who  depend  upon  the  central  whole- 
sale markets  as  a  direct  source  of  supply."  4 

Distribution  from  Central  Markets. — There  are  a  number 
of  channels  for  the  distribution  of  products  from  central  mar- 

3  This  must  be  done  if  it  has  not  been  well  done  at  the  farm  .or  in  tne 
country  market,  and  it  very  often  has  not. 

4  Grover  G.  Huebner,  Agricultural  Commerce,  p.  14. 


THE  WHOLESALING  OF  FARM  PRODUCTS      57 


kets.  A  very  large  percentage  is  sold  locally  to  mills  and  fac- 
tories for  processing — as  in  the  case  of  live  stock,  grain, 
cotton — and  many  food  products  ready  for  sale  to  consum- 
ers are  sold  to  local  retail  stores;  but  another  large  part  is 
shipped  out  to  other  central  wholesale  markets,  to  jobbing 
markets,  and  to  outside  retail  markets.5 

Products  are  often  shipped  from  one  wholesale  market  to 
another.  This  is  sometimes  necessary  because — as  the  result 
of  an  inefficient  market  news  service--too  much  of  a  product 
is  sent  to  one  market  and  too  little  to  another.  In  conse- 
quence the  price  in  the  latter  becomes  high  enough  to  warrant 
reshipment.  Thus  fruit  that  was  shipped  to  a  wholesale 
market  in  which  an  oversupply  had  caused  a  fall  in  price 
has  been  known  to  be  shipped  out  to  another  market.  But 
when  the  fruit  reached  the  second  market  the  price  had  fallen 
there  and  it  was  shipped  back  to  the  first,  where  it  was  finally 
sold  at  retail.6  This  procedure  is  wasteful,  but  it  is  becom- 

5  The  table  below — from  the  Report  of  the  Federal  Trade  Commission 
on  the  Grain  Trade  (1920),  Vol.  II,  p.  24 — shows  the  average  annual 
receipts,  shipments,  and  local  consumption  of  wheat  from  1913  to  1917 
in  10  primary  wheat  markets  of  the  United  States. 

TABLE   IV. — Average   annual   receipts,   shipments,   and    local   consumption   of 

wheat  at  10  primary  markets  for  the  five  calendar  years  1913  to  1917. 

[In  bushels,  OOO's  omitted.] 


Receipts. 

Shipments. 

Local 
consumption. 

Per  cent  of 
local    con- 
sumption   to 
receipts. 

Minneapolis    

120,151 

38,521 

81,630 

67.94 

Kansas  City  

55,012 

43  986 

11  026 

20  91 

Chicago 

65  412 

58  127 

7'28f> 

11  14 

St    Louis 

34  209 

27  090 

7  119 

20  81 

*>1  275 

17  889 

3  386 

15  92 

Milwaukee 

8  002 

4  933 

3  129 

38  81 

Duluth 

50  884 

54  090 

2  794 

4  91 

Indianapofis  *     
Cincinnati           ...    . 

3.390 
5,9.~>5 

1.255 
4  356 

2,135 

1,599 

62.98 

26.85 

Peoria   

3,079 

2,974 

105 

3.41 

Total 

374  029 

253  221 

120,808 

32.30 

*  2-year  average,  1916-17. 

6J.  Russell  Smith,  "Price  Control  through  Industrial  Organization," 
Annals  oj  the  American  Academy,  Vol.  LXXIV  (Nov.,  1917),  pp. 
280-283. 


58  PRINCIPLES  OF  MARKETING 

ing  less  and  less  common  as  facilities  for  gathering  and  dis- 
seminating market  news  improve.  In  a  greater  number  of 
cases  products  are  sold  by  dealers  in  one  central  market  to 
those  in  another,  because,  as  in  the  last  case,  the  demand  at 
the  second  is  relatively  greater  than  at  the  first.  But,  as  the 
second  market  has  no  established  business  connections  with 
growers  and  local  shippers  who  are  normally  shipping  to  the 
first,  it  is  found  easier  and  probably  cheaper  to  buy  from 
the  dealers  of  that  market.  The  product  itself  may  in 
fact  go  directly  to  the  second  market  and  only  the  purchase 
be  made  through  the  dealers  of  the  first.  Cotton,  for  ex- 
ample, is  very  largely  bought  by  eastern  mills  through  New 
York  dealers,  but  much  of  the  actual  cotton  is  stored  by  the 
dealer  in  southern  cities,  or  by  local  merchants  in  the  South, 
from  whom  the  New  York  merchant  purchases.  The  cotton 
itself  may  never  reach  New  York.7 

Goods  ready  for  personal  consumption  without  processing 
are  shipped  in  large  amounts  from  central  markets  to  job- 
bing markets  in  the  same,  as  well  as  in  other,  cities.  Fruit, 
for  instance,  comes  into  the  wholesale  market  at  West  Phila- 
delphia in  carloads.  There  it  is  divided  into  a  few  large 
lots  and  sold  to  retailers  and  jobbers.  Some  of  the  fruit  sold 
to  jobbers  is  taken  by  them  to  the  jobbing  market  on  Dock 
Street  in  Philadelphia,  where  it  is  sold  in  smaller  quantities 
to  retailers.  It  is  also  sold  to  those  jobbers  from  outside 
the  city  whose  sales  in  their  own  cities  are  not  large  enough 
to  warrant  buying  at  the  West  Philadelphia  market. 

Classes  of  Markets. — Several  types  of  markets  may  be 
distinguished  in  the  domestic  marketing  of  farm  products. 
Among  the  more  important  of  these  are:  (1)  local  markets, 
(2)  central  or  terminal  markets,  (3)  secondary  wholesale 
markets,  and  (4)  retail  markets.  Local  markets  are  those 
markets — close  to  the  areas  of  production — in  which  the 
farmer  can  dispose  of  his  products  to  final  consumers,  mills, 

7  See  M.  T.  Copeland,  The  Cotton  Manufacturing  Industry  of  the 
United  States,  pp.  179-184. 


THE  WHOLESALING  OF  FARM  PRODUCTS      59 

factories,  or  local  shippers.  They  are  also  called  growers'  local 
markets  and  country  shipping  points.  Central  or  terminal 
markets  are  markets  in  which  products  are  concentrated  from 
the  growing  areas  and  from  which  they  are  shipped  on  to 
other  wholesale  markets,  or  dispersed  to  mills  or  factories,  and 
to  jobbing  or  retail  markets.  Secondary  wholesale  markets 
may  be  central  wholesale  markets  which  receive  goods  from 
central  markets  to  disperse  to  mills  and  factories,  and  to  job- 
bers; or  they  may  be  jobbing  markets.  In  the  latter  case 
they  are  also  called  jobbing  markets,  or  consumption  whole- 
sale markets.8  In  the  retail  market  are  found  the  public 
retail  market  places,  stores,  hucksters,  and  peddlers  that  sup- 
ply the  final  consumer.  Most  markets  combine  from  two  to 
four  of  the  types  of  trade  on  which  this  classification  is 
based,  and  so  it  is  not  always  easy  clearly  to  differentiate  a 
particular  market.  There  is,  however,  usually  one  class  of 
trade  which  predominates. 

Relation  of  These  Markets  to  Consumption  Goods  and 
Raw  Materials. — Products  ready  for  personal  consumption 
without  processing  are  likely  to  be  sold  through  agencies  op- 
erating in  each  of  the  first  four  markets.  They  are  also  likely 
to  be  physically  handled  in  each  before  their  final  consump- 
tion. Raw  materials  for  manufacture,  on  the  other  hand, 
usually  pass  through  but  two:  the  growers'  local  market, 
,and  the  central  wjjjilrjnjp  mnrUrt  In  case  they  are  manu- 
factured into  consumers'  goods  they  may  then  go  through 
the  jobbing  and  retail  markets  for  manufactured  goods. 

Fruits  serve  for  illustration  of  products  used  for  final  con- 
sumption in  their  original  state.  These  are  commonly  con- 
centrated at  local  shipping  points  and  then  dispatched  in  car- 

8  For  extended  discussions  of  markets  in  the  wholesale  produce  trade 
see  E.  G.  Nourse,  Chicago  Produce  Market;  The  Report  of  the  Federal 
Trade  Commission  on  the  Wholesale  Marketing  of  Food  (June  30, 
1919) ;  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products,  Chaps.  II-IV, 
VII,  VIII,  -XVIII,  XX;  and  G.  G.  Huebner,  Agricultural  Commerce, 
Chap.  II. 


V 


DIAGRAM  TV. — Main  Channels  of  Distribution  for  Fruits  and  Vegetables.* 

*  J.  H.  Collins,  J.  W.  Fisher,  Jr.',  and  Wells  A.  Sherman,  Methods  of 
Wholesale  Distribution  of  Fruits  and  Vegetables  on  Large  Markets,  p.  22. 
U.  S.  Dept.  of  Agr.,  Bui.  207  (1915). 


60 


THE  WHOLESALING  OF  FARM  PRODUCTS      61 

load  lots  to  central  markets.  Here  they  are  sold  to  local  dis- 
tributors, to  dealers  in  outlying  markets  in  the  same  city, 
and  to  jobbers  in  smaller  cities.  These  latter  dealers  are 
mainly  the  middlemen  of  the  jobbing  market  whose  function 
it  is  to  link  the  large  receivers  of  the  central  market  with 
the  retail  outlets  for  fruit.  They  buy  in  large  lots  from  the 
wholesale  receivers  of  the  central  market,9  and  divide  these 
large  lots  into  smaller  quantities  of  the  proper  grade  and 
quality,  to  be  sold  to  the  numerous  retail  outlets  which  sup- 
ply the  consumer. 

Grain  serves  as  a  good  example  of  a  raw  material.  The  bulk 
of  the  grain  from  the  wheat  belt  is  sold  to  elevator  companies 
at  local  markets,  arid  shipped  to  a  central  market,  such  as 
Minneapolis,  Chicago,  or  Duluth,  where  it  is  held  by  central 
market  dealers  and  either  stored  or  used  in  local  mills.  Of 
the  stored  grain,  as  well  as  of  incoming  grain  just  received 
at  such  markets,  a  goodly  portion  is  sold  to  dealers  and  mills 
in  other  regions,  domestic  and  foreign.10  Grain  does  not  enter 
into  jobbing  market  transactions,  and  it  is  not  ready  for 
final  consumption,  but  it  may  actually  change  hands  several 
times  before  reaching  the  mill  in  which  it  is  to  be  used;11 

9  See  pp.  86-87. 

10  "There  are  a  number  of  different  routes  over  which  grain  from  these 
primary  markets  is  carried  to  seaports  or  to  eastern  mills."    These  in- 
clude the  lake  routes  from  Duluth  and  Chicago,  and  all-rail  shipments 
and   the   rail-and-canal   movement,   through   Buffalo   to   the   seaboard. 
"Lake-and-rail  routes  terminate  also  at  other  north  Atlantic  ports  besides 
New  York,  the  transfer  from  lake  to  rail  being  made  at  eastern  ports  of 
Lake  Erie,  and  even  as  far  east  as  Ogdensburg,  on  the  St.  Lawrence 
River. 

"In  addition  to  the  shipments  eastward  and  across  the  Canadian 
border,  an  important  outlet  for  the  grain  grown  in  the  Great  Lakes 
region,  especially  in  the  southern  part  of  it,  has  been  opened  toward  the 
south,  and  a  large  part  of  the  traffic  is  thus  diverted  through  the  Gulf 
ports." — From  George  K.  Holmes,  Systems  of  Marketing  Farm  Prod- 
ucts and  Demand  jor  Such  Products  at  Trade  Centers  (1913),  U.  S.  De- 
partment of  Agriculture,  Report  No.  98,  pp.  68-69. 

11  Much  of  the  changing  of  hands  which  takes  place  is  but  the  change 


62  PRINCIPLES  OF  MARKETING 

and  it  may  pass  from  primary  wholesale  markets  to  other  do- 
mestic wholesale  markets,  or  to  seaboard  and  foreign  whole- 
sale markets. 

Functions  of  These  Markets. — Although  the  functions  per- 
formed by  the  different  markets  are  in  some  regards  similar, 
there  are  special  reasons  for  the  existence  of  each.  The  prin- 
cipal function  performed  in  the  local  growers'  market  is  to 
make  it  convenient  for  the  grower  to  sell  his  produce  and  to 
facilitate  the  collection  of  the  products  from  growers  in  suf- 
ficient quantities  to  send  them  to  large  markets  in  carload 
shipments.  This,  the  first  step  in  the  concentration  of  agri- 
cultural products  at  the  great  central  markets,  usually  calls 
for  provision  for  weighing,  storing,  loading,  and  in  some 
cases,  as  with  fruits,  for  assorting,  grading,  and  packing.  It 
provides  the  farmer  with  a  ready  market  in  case  he  desires 
to  sell  or  ship  at  once,  or  with  storage  facilities  when  he  pre- 
fers to  hold  his  product.  In  case  his  production  is  small,  he 
is  saved  the  extra  expense  of  shipping  his  own  product  in  less 
than  carload  lots,  as  well  as  the  difficulties  involved  in  es- 
tablishing direct  business  contacts  with  the  central  market. 
Throughout  the  great  grain,  live  stock,  cotton,  tobacco,  vege- 
table, and  fruit  growing  regions  there  are  hundreds  of  such 
markets  in  which  one  or  more  middlemen  are  found  ready  to 
deal  with  the  growers.12  To  provide  facilities  for  shipping 
commodities  out  of  the  community  is  not,  however,  the  only 
function  of  the  local  merchant,  for  many  of  the  purchases 
made  there  are  for  local  consumption  or  for  use  in  local 
plants. 

Central  Markets. — It  has  been  shown  that  most  agricultural 
products,  whether  sold  to  mills  and  factories  or  consumed 

of  ownership.  The  grain  is  likely  to  remain  stored  in  one  place  until 
the  miller  wants  it  for  use. 

12 13,916  local  grain  elevators  and  warehouses  were  reported  to  the 
Federal  Trade  Commission  as  being  in  existence  in  the  principal  grain 
states  in  1919.  Report  oj  the  Federal  Trade  Commission  on  the  Grain 
Trade,  Vol.  I,  pp.  33-35. 


THE  WHOLESALING  OF  FARM  PRODUCTS      63 

in  their  original  form,  must  Jbe  collected  from  wide  areas  and 
concentrated  at  the  great  centers  of  manufacture  and  con- 
sumption, and  that  even  products  sold  to  smaller  cities  and  to 
farmers  themselves  must  often  be  concentrated  before  they 
are  dispersed  to  these  smaller  markets.13  Central  markets, 
located  at  the  center  of  that  process  of  concentration  followed 
by  dispersion  which  has  been  described,  are  important  fac- 
tors in  this  process.  They  are  found  in  cities  located 
strategically  between  the  great  producing  and  consuming  areas 
andjDossessing  superior  transportation  facilities.14  Cities  of 
this  kind  are  themselves  commonly  large  manufacturing  and 
consuming  centers  in  which  great  quantities  of  the  products 
concentrated  therein  are  used.15  To  handle  the  products 
manufactured  and  consumed  locally,  as  well  as  those  which 
center  there  to  be  shipped  to  dealers,  manufacturers,  and 
consumers  at  other  points,  an  efficient  market  mechanism  has 
been  developed;  and  this  has  been  expanded  to  handle  far 
more  than  local  consumption  demands.  Here  are  found  the 
great  storehouses,  banking  and  credit  agencies,  exchanges,  and 
other  market  institutions  so  important  to  successful  distribu- 
tion. Because  of  their  equipment  and  because  of  their 
strategic  location  and  the  large  volume  of  products  used 
there,  it  is  but  natural  that  producers  turn  to  such  cities 
for  a  market  in  which  to  sell,  and  that  buyers  look  to  them 
as  a  source  of  supply. 

13  There  are  sometimes  preliminary  points  of  concentration  to  which 
goods  are  shipped  before  they  are  sent  to  the  great  terminal  markets. 
Thus  in  the  produce  trade,  poultry  and  eggs  are  quite  extensively  col- 
lected at  these  local  markets  and  from  there  sent  on  to  the  larger  mar- 
kets.   Tobacco  is  often  handled  in  a  similar  manner  and  cotton  is  col- 
lected at  local  points  of  concentration  from  which  it  is  sent  on  to  larger 
markets. 

14  See  Ellen  Churchill  Semple,  American  History  and  Its  Geographic 
Conditions  (1903),  Chaps.  XVI  and  XVII. 

"There  are  important  exceptions:  New  Orleans  consumes  little  cot- 
ton; San  Francisco,  no  wool;  Galveston  and  Port  Arthur  consume  little 
wheat.  These  last  two  are  really  export  markets,  or  transshipment 
points,  rather  than  true  central  markets. 


64  PRINCIPLES  OF  MARKETING 

Chicago,  St.  Louis,  Kansas  City,  and  Minneapolis,  the  cen- 
ters of  large  consuming  areas,  strategically  located  between 
the  centers  of  production  of  grain,  live  stock,  and  other  farm 
produce  and  the  centers  of  manufacture  and  consumption,  are 
important  central  markets.  Each  is  at  the  head  of  water 
navigation  for  a  large  producing  area,16  .and  each  is  at  the 
center  of  transportation  systems  which  connect  great  agricul- 
tural districts  with  populous  districts  to  the  south  and  east.17 
Galveston  and  Port  Arthur  are  somewhat  similarly  located 
with  respect  to  the  grain  which  goes  to  market  by  way  of 
the  Gulf,  but  these  cities  are  not  great  markets,  in  part 
because  they  do  not  have  an  important  consuming  and  manu- 
facturing population.  They  are  transshipment  points  between 
railroads  and  vessels.  New  Orleans  and  Baltimore,  in  similar 
locations,  and  having  in  addition— particularly  in  the  case  of 
Baltimore — a  large  consumption  demand,  are  great  central 
markets,  as  well  as  transshipment  points  for  cotton  and  to- 

18  This  is  not  literally  true  of  Minneapolis  today,  of  course,  because 
the  river  is  seldom  used  at  present.  But  the  railways  now  supply  the 
needed  transportation. 

17  "For  the  South — with  its  autumn  turkeys,  winter  vegetables  and 
citrus  fruits,  early  spring  eggs,  and  early  summer  peaches  and  melons — 
Chicago  stands  as  the  natural  gateway  to  many  other  cities  and  towns 
of  the  North,  as  well  as  the  home  of  three  million  ultimate  consumers 
of  these  products.  Not  less  is  it  the  ga'teway  to  the  South,  through 
which  a  great  volume  of  the  products  of  the  North  are  distributed — 
late  fruits  and  vegetables  to  prolong  the  Southern  'season,'  and,  during 
the  winter,  hardy  fruits  and  vegetables,  apples,  and  cranberries.  From 
the  mid- West  (besides  live  stock,  and. cereals),  dairy  products,  eggs,  and 
poultry  are  drawn  to  Chicago's  depot,  and  the  surplus  over  her  own 
needs  sent  East  to  other  consuming  centers  or  to  points  of  export. 
From  producing  and  importing  points  in  the  East  she  draws  supplies — 
bananas,  lemons,  grapes,  cheese,  cabbage,  and  other  fruits  and  vegetables 
— for  her  own  use  and  for  re-sale  to  other  markets  farther  west.  In 
turn  she  helps  to  supply  the  Eastern  markets  with  every  choice  product 
of  the  Western  country — Minnesota  butter,  Iowa  eggs,  Colorado  canta- 
loupes, California  fruits  and  winter  vegetables,  Northwest  apples,  and 
countless  other  products." — Edwin  G.  Nourse,  The  Chicago  Produce 
Market,  pp.  7-8. 


THE  WHOLESALING  OF  FARM  PRODUCTS      65 

bacco  respectively.  The  Pacific  ports  serve  as  central  markets 
for  the  produce  of  the  far  West. 

Dispersion  from  Central  Markets. — Of  the  goods  concen- 
trated at  central  markets,  many  are  sold  there — the  raw 
materials  to  local  manufacturers,  the  consumers'  goods  to  the 
people  of  the  community.  But  concentration  takes  place  far 
in  excess  of  local  consumption  and  production  uses,  and  prod- 
ucts are  shipped  on  to  other  consuming  and  manufacturing 
centers. 

This  tendency  to  concentrate  wholesaling  at  a  particular  point 
grows  with  time  until  it  may  well  be  true  that,  although  much 
of  the  produce  could  pass  as  efficiently  through  "other  cities,  it 
continues  in  the  usual  way*  by  reason  of  the  customs  and 
habits  of  the  trade  and  the  lack  of  trade  facilities  in  other 
cities.  And  even  when  such  changes  do  take  place  the  gen- 
eral tendency  toward  concentration  is  not  eliminated;  it  is 
merely  transferred  in  part  to  another  center.  As  the  live 
stock  industry,  for  example,  moved  westward,  first  Cincinnati 
and  then  Chicago  became  the  chief  center.  The  latter  is 
still  the  principal  center,  but  St.  Louis,  Kansas  City,  Omaha, 
St.  Joseph,  St.  Paul  and  other  cities  have  gradually  become 
central  markets  for  live  stock,  in  part  to  supply  local  pack- 
ing houses,  in  part  as  primary  markets  in  the  concentration 
of  live  stock  to  supply  numerous  packing  plants  farther 
east. 

It  is  possible  to  carry  on  the  process  of  transferring  title 
through  the  large  market  without  actually  shipping  the 
product  there,  and  many  products  bought  and  sold  on  these 
markets  never  actually  reach  them.  In  the  latter  case  the 
advantages  to  be  derived  from  having  all  purchases  and  sales 
for  a  large  area  concentrated  at  one  point  can  be  gained, 
without  the  disadvantages  which  may  arise  from  physically 
concentrating  the  goods  there.  New  York  cotton  merchants,  for 
example,  sell  to  New  England  mills  cotton  stored  in  southern 
t  cities  and  have  it  shipped  directly  to  the  mills;  and  Chicago 
brokers  and  merchants  divert  to  other  markets  products  en 


66  PRINCIPLES  OF  MARKETING 

route  to  that  city,  or  ship  to  eastern  markets  goods  stored  at 
points  outside  Chicago.  In  such  cases  only  the  transfer  of 
title  takes  place  through  the  central  market,  with  perhaps 
some  financing  or  hedging  transactions  supplementing  the  ex- 
change.18 The  proportion  of  the  concentrated  crops  which 
is  consumed  locally,  as  contrasted  with  that  which  is  shipped 
to  nearby  markets  and  to  distant  markets  at  home  and  abroad, 
varies  greatly.19  Many  of  these  markets,  in  addition  to  ob- 
taining goods  directly  from  growing  areas,  also  receive  large 
amounts  of  their  products  from  other  central  markets,  domes- 
tic and  foreign. 

Primary  Markets. — In  the  grain  trade  the  central  markets 
which  receive  products  chiefly  from  the  growers'  markets  are 
commonly  called  primary  markets.  These  markets  are  found 
at  strategic  locations  in  the  grain  growing  states  and  are  gen- 
erally on  the  Great  Lakes  or  inland  waterways.  They  are 
well  equipped  with  railway  facilities  both  for  receiving  grain 
from  the  country  and  for  shipping  it  eastward  and  southward 
to  other  parts  of  the  country,  in  which  it  is  used  domestically 
or  from  which  it  is  shipped  abroad.20  Practically  all  of  these 

18  Financing  is  discussed  in  Chap.  XVI,  hedging  in  Chap.  XVII. 

19  "Over  180,000  cars  of  perishable  foods  are  consigned  annually  to 
Chicago,  but  nearly  half  of  these  are  transferred  and  reconsigned  to 
other  points,  especially  to  the  eastern  markets.    The  expense  and  waste 
incident  to  delays  and  difficulties  of  switching  cars  from  the  line   on 
which  they  arrive  to  the  line  of  departure  from  Chicago,  and  the  value 
of  the  time  lost  in  locating  and  inspecting  cars  at  the  various  yards, 
constitute  an  important  item  in  reconsigning  cars  from  Chicago,  and  is 
passed  on  to  the  ultimate  markets  as  fully  as  is  possible." — Report  of 
the  Federal  Trade  Commission  on  the  Wholesale  Marketing  of  Food 
(1920),  p.  116. 

20  Some  of  the  more  important  primary  markets  are  Chicago,  Minne- 
apolis, Kansas  City,  St.  Louis,  Duluth,  Milwaukee,  Omaha,  Peoria,  Louis- 
ville,   Cincinnati,    Indianapolis,    Toledo,    Cleveland,    Detroit,    Wichita. 
Water    transportation    is    now    important    to    less   than    half    of    these 
points.     But  their  strategic  location  on  waterways  accounts  ii_ 

part  for  their  original  development  as  markets. 


THE  WHOLESALING  OF  FARM  PRODUCTS      67 

markets  are  situated  in  cities  where  local  mills,  distilleries, 
and  other  manufacturing  plants  consume  large  quantities  of 
the  grain  received.  As  a  rule,  however,  these  markets  reship 
well  over  half  their  receipts. 

Seaboard  Markets. — There  are  also  large  seaboard  markets 
on  the  Atlantic,  Pacific,  and  Gulf  coasts.21  The  grain  re- 
ceived at  eastern  markets  is  principally  distributed  through- 
out the  East,  but  it  is  also  exported,  and  much  of  the  grain 
exported  from  interior  markets  is  shipped  through  these  ports. 
The  Gulf  ports — New  Orleans,  Mobile,  Galveston,  Port  Arthur 
• — serve  very  largery  as  exporting  markets,  although  much  of 
the  grain  passing  through  them  is  actually  sold  through  other 
markets.  The  Pacific  ports — San  Francisco  and  Portland, 
and  the  Puget  Sound  ports — in  addition  to  performing  these 
functions,  are  also  primary  markets  for  the  western  grain 
and  wool  growing  areas.  They  also  serve  as  local  markets, 
since  much  western  grain  is  shipped  directly  to  these  cities 
without  being  sold  at  growers'  markets. 

The  Cotton  and  Wool  Markets. — Export  markets  are  more 
important  in  the  marketing  of  cotton  than  of  grain  because 
more  than  half  the  cotton  crop  is  usually  exported,  chiefly  to 
England,  Germany,  and  France,  whereas  until  the  World  War 
the  increasing  domestic  demand  for  grain  had  made  the  for- 
eign markets  less  and  less  important.  Although  a  large  part 
of  the  cotton  crop  is  concentrated  at  interior  central  markets 
— "interior  points  of  concentration" — such  as  Dallas,  St. 
Louis,  Memphis,  Augusta,  and  Montgomery,  over  half  the 
crop  is  usually  shipped  directly  from  local  shipping  and  com- 
press points  to  local  mills,  eastern  mills,  seaports,  and  directly 
to  foreign  markets.  More  than  two-thirds  of  the  crop  is 
annually  shipped  to  the  southern  ports  from  local  markets. 
It  is  there  consumed  locally,  sold  on  local  markets,  or  trans- 
ported by  water  to  northern  cities  and  abroad.  New  York 

21  Boston,  New  York,  Philadelphia,  Baltimore,  Newport  News,  New 
Orleans,  Galveston,  San  Francisco,  Seattle,  etc. 


68  PRINCIPLES  OF  MARKETING 

and  Boston  receive  most  of  their  cotton  from  the  central 
markets  of  the  interior  and  from  the  southern  ports,  rather 
than  from  local  shipping  points. 

Most  of  our  great  American  crops,  the  cereals,  cotton,  to- 
bacco, are  important  export  crops.  Wool  on  the  other  hand  is 
more  largely  imported  than  exported,  over  one-third  of  the 
local  consumption  being  foreign  grown.  Here  likewise  there 
are  interior  and  seaboard  central  markets.  But  the  seaboard 
markets,  of  which  the  chief  are  Boston,  New  York,  and  Phila- 
delphia, are  of  far  greater  importance  than  the  interior  mar- 
kets, because  they  serve  as  import  markets,  are  in  the  center 
of  the  wool  manufacturing  areas,  and  are  favored  by  rail 
rates  for  the  handling  of  the  domestic  clip.  Chicago,  St. 
Louis,  and  Omaha  are  important  interior  markets;  and  San 
Francisco  and  Portland,  well  located  for  ocean  shipment  and 
with  favorable  transcontinental  rail  rates,  are  also  important. 

Exchanges  and  Auction  Companies. — A  distinguishing 
feature  of  central  markets  is  the  importance  therein  of  the 
sale  of  farm  products  upon  exchanges.  There  are  two  types 
of  exchanges:  those  on  which  a  single  product  is  sold,  and 
those  on  which  several  products  are  exchanged.22  The  Chi- 
cago Board  of  Trade  and  the  New  York  and  Boston  produce 
exchanges  are  examples  of  the  latter.  But  wool,  cotton,  to- 
bacco, and  dairy  products,  are  often  sold  on  exchanges  which 
specialize  in  the  handling  of  a  single  product.  Examples  are 
found  in  the  New  York  Coffee  Exchange,  Louisville  Tobacco 
Exchange,  and  the  New  Orleans  and  New  York  cotton  ex- 
changes.23 On  some  exchanges  organized  speculative  trading 
in  "futures"  is  an  important  feature;  on  others,  there  is  none 
at  all. 

Another  peculiarity  of  the  central  market  is  the  auction 
company  through  which  fruits  in  particular  are  sold.  Auctions 

33  See  Weld,  op.  tit.,  Chap.  XIII. 

23  It  is  probable,  however,  that  the  reason  for  this  difference  is  not 
entirely  inherent  in  the  product,  but  is  due  to  the  fact  that  some  cities 
are  so  located  as  to  contain  a  central  market  for  but  a  single  product. 


THE  WHOLESALING  OF  FARM  PRODUCTS      69 

are  of  most  importance  when  the  product  is  perishable  or 
/'comes  to  market  in  large  quantities  from  distant  areas.  They 
/  are  of  some  impojrtanc^^articularly  in  Europe,  in  the  sale  of 
imported  raw  materials;  and  thpMar£psf.  f^  auctionin  the 
world  is  located  at  St.  Louis.  The  extent  of  the  useTof  both 
auctions  and  exchanges  varies  greatly  as  between  different 
products  and  different  markets.  In  fact,  a  very  large  part 
of  all  agricultural  products,  both  raw  materials  and  consump- 
tion goods,  is  exchanged  at  the  central  market  through  private 
sale,  even  though  the  transaction  may  be  made  subject  to 
the  rules  of  an  exchange.2* 

Jobbing ' Markets. — The  main  service  of  jobbing  markets, 
which  are  also  called  secondary  wholesale  markets,  and  con- 
sumption wholesale  markets,  is  to  assemble  products  for  the 
surrounding^retail  markets,  that  is,  for  sale  to  retail  stores. 
Jobbmgmarkets  are  operated  on  a  smaller  scale  than  are 
the  central  markets,  do  not  play  so  large  a  part  in  the  de- 
termination of  prices,25  and  perform  only  those  operations 
which  enable  them  to  supply  their  immediate  clientele.  In 
assembling  the  products  which  the  trade  requires,  they  serve 
to  disperse  products  concentrated  at  central  markets  to  vari- 
ous retail  outlets.  Thus  apples  are  concentrated  at  central 
markets,  thence  dispersed  to  jobbing  markets,  and  from  these 
dispersed  in  turn  to  retailers.  But  this  work  in  dispersing  is 
simply  another  aspect  of,  and  is  conditioned  by,  the  effort 
to  assemble  the  various  goods  which  retailers  demand.  Such 
a  market  may  assemble  goods  from  central  markets,  from 
other  jobbing  markets,  from  local  growers'  markets,  and  even 
directly  from  growers  themselves. 

As  thus  described,  it  is  evident  that  similar  markets  are  not 
found  for  raw  materials,  as  these  are  not  retailed!.  There  is, 
however,  a  dispersion  of  raw  materials  from  central  markets 
to  outlying  secondary  wholesale  markets  and  manufacturing 

24  The  exchange  operations  are  discussed  on  pp.  361-362,  the  auction 
on  pp.  87-88. 

25  See  pp.  435-440. 


70  PRINCIPLES  OF  MARKETING 

centers  which  corresponds  to  the  dispersion  of  single  products 
from  the  jobbing  markets.  Raw  cotton,  for  example,  for  use 
by  northern  mills  is  bought  through  New  York  dealers  who 
have  concentrated  the  ownership,  if  not  the  actual  cotton,  in 
New  York,  a  central  market,  whence  it  is  dispersed  to  dealers 
and  mills  in  manufacturing  centers.  And  grain  owned  by 
dealers  in  Minneapolis,  Chicago,  and  other  central  markets  is 
sold  by  them  to  outlying  mills  and  to  dealers  in  other  mar- 
kets, who  in  turn  sell  to  manufacturers.  The  truest  parallel, 
however,  to  the  jobbing  market,  so  far  as  raw  materials  are 
concerned,  is  the  jobbing  market  for  the  manufactured  prod- 
ucts into  which  the  raw  materials  are  made.26 

The  Jobber. — The  chief  middleman  of  the  jobbing  market 
is  the  jobber,  and  it  is  his  activity  which  largely  determines 
the  nature  of  that  market.  The  amount  of  a  product  which 
his  market  will  consume  largely  determines  the  market  in 
which  a  jobber  will  buy.  If  it  consumes  large  enough  quan- 
tities to  warrant  purchases  in  car  lots,  he  is  likely  to  buy 
directly  from  the  growers'  market,  in  car  lots  sent  from  the 
local  shipping  point.  At  times  a  number  of  jobbers  will  com- 
bine in  ordering  a  car,  and  pool  the  costs  and  contents  of  the 
car  on  an  agreed  basis.  But  in  many  markets,  and  for  per- 
ishable products  in  particular,  jobbers  do  not  sell  in  large 
enough  lots  to  warrant  such  large  purchases — in  this  case  they 
are  likely  to  look  to  nearby  central  markets. for  their  supply. 

Some  Cities  Have  Both  Jobbing  and  Central  Markets. — 
Although  the  distinction  between  the  operations  of  a  central 
market  and  a  jobbing  market  is  easy  to  draw,  actual  markets 
cannot  be  so  readily  divided.  Some  markets  which  are  pri- 
marily jobbing  markets  also  reship  produce  to  other  jobbing 
markets,  and  it  is  safe  to  say  that  all  central  markets  do  a 
jobbing  business.  Thus  Boston  is  primarily  a  jobbing  market, 
concentrating  products  for  local  consumption.  But  it  also 
supplies  the  surrounding  territory,  in  doing  which  it  acts 
partly  in  the  capacity  of  a  jobbing  market  and  partly  in  the 

26  See  pp.  115-119. 


THE  WHOLESALING  OF  FARM  PRODUCTS      71 

capacity  of  a  central  market,  shipping  goods  out  to  jobbers 
in  surrounding  markets.27  It  also  serves  as  a  central  market 
for  wool.  New  York  is  primarily  a  jobbing  market  for  food 
stuffs  of  the  farm,  but  it  is  a  central  market  for  grain,  wool, 
and  cotton,  and  for  many  imported  products,  such  as  rubber, 
coffee,  and  wool.  In  Chicago,  Minneapolis,  New  Orleans,  and 
St.  Louis,  on  the  other  hand,  the  work  of  reshipping  con- 
centrated farm  products  to  other  cities  and  to  foreign  coun- 
tries plays  a  much  greater  part  than  does  the  work  of  job- 
bing. But  in  each  of  these  there  is  also  a  great  consuming 
population  and,  hence,  a  large  jobbing  market.  Further- 
more, a  city  is  likely  to  be  a  central  market  for  but  a  few 
products,  whereas  it  must  usually  be  a  jobbing  market  for  all 
products  consumed  locally.  Certain  products  are  concentrated 
both  for  local  consumption  and  for  reshipment  to  other  points, 
but  there  is  assembled  the  much  greater  variety  of  all  kinds  of 
agricultural  products  which  are  consumed  by  the  local  popu- 
lation. Some  cities  are  usually  thought  of,  nevertheless,  as 
primarily  central  markets,  because  through  their  location  they 
have  come  to  play  an  important  part  in  the  concentration  and 
dispersion  of  a  great  variety  of  products. 

But  not  only  is  it  difficult  to  say  that  a  city  is  primarily 
a  central  market  or  primarily  a  jobbing  market:  it  is  usually 
difficult  to  say  that  a  particular  market  place  within  a  city  is 
primarily  a  central  market  or  a  jobbing  market.  This  is  be- 
cause the  middlemen  handling  the  products  do  not  confine 
themselves  to  any  one  class  of  business,  but  seek  their  sources 
wherever  they  seem  best  at  the  moment  and  sell  their  products 
wherever  the  best  market  offers,  regardless  of  whether  that  be 
the  wholesale  middlemen  in  another  market,  or  the  local  retail 
dealers. 

The  Retail  Market. — Raw  materials  are  usually  exchanged 
in  large  lots  on  a  wholesale  basis.  They  are  not  retailed. 
Goods  ready  for  personal  consumption  in  their  original  state 

27  See  A  Summary  of  the  Market  Situation  in  Boston,  The  City  Plan- 
ning Board,  Boston,  Mass.,  June,  1915. 


72  PRINCIPLES  OF  MARKETING 

must,  on  the  other  hand,  pass  through  the  retail  market.  The 
retail  market  for  these  is  found  wherever  final  consumers 
make  their  purchases.  The  dealers  of  this  market  some- 
times secure  their  products  from  the  grower,  thus  forming  a 
part  of  the  growers'  local  market,  but  more  often,  they  buy 
from  central  and  jobbing  markets.  This  is  the  final  link  in 
the  chain  of  distribution  of  agricultural  consumers'  goods.  The 
reader  should  again  be  cautioned,  however,  that  many  prod- 
ucts of  the  farm  are  not  sold  to  consumers  in  their  original 
form,  but  must  pass  through  one  or  more  processes  of  manu- 
facture, and  in  some  cases  will  never  reach  ultimate  con- 
sumers. Wheat,  cotton,  rye,  barley,  tobacco,  live  stock,  for 
example,  are  all  processed  in  some  degree.  The  retail  market 
for  such  goods  is  a  market  for  manufactured  products,  and 
the  jobbing  market  becomes  a  wholesale  or  jobbing  market  for 
manufactured  goods — a  market  in  which  products  are  assem- 
bled for  distribution  directly  from  manufacturers  rather  than 
from  middlemen  in  a  central  agricultural  market,  or  from 
growers  and  growers'  markets.28 

Summary. — From  the  discussion  thus  far  it  has  appeared 
that  at  least  four  important  types  of  agriculturaLmarkets  are 
discernible.  But  by  no  means  all  agricultural  products  pass 
through  each.  Raw  materials  are  likely  to  be  sold  by  the 
grower  at  his  local  market  and  thence  shipped  to  the  central 
market  where  they  are  sold  to  manufacturers.  In  some  cases, 
however,  growers  sell  directly  to  manufacturers,  and  in  many 
cases  the  local^merchant  sells  to  a  manufacturer  without  re- 
course to  any  central  market  middleman,  or  the  central 
market  middleman  buys  directly  from  the  grower  withouj, 
recourse  to  an  indepjejodsntjpiddleman  at  the  grower's  market. 
Products  to  be  sold  to  ultimate  consumers  in  practically  the 
form  in  which  they  leave  the  farm  are,  however,  very  likely 
to  pass  through  each  of  the  four  markets  enumerated,  going 

38  The  problems  of  retailing  farm  products  are  so  closely  interwoven 
with  the  retailing  of  manufactured  goods  that  the  discussion  of  the  re- 
tail market  as  a  whole  will  be  taken  up  in  Chaps.  XI  and  XII. 


THE  WHOLESALING  OF  FARM  PRODUCTS      73 

(1)  through  the  local  market,  (2)  to  the  central  market,  from 
thence  (3)  to  a  jobbing  market,  and  finally  (4)  to  the  retail 
market.  But  it  has  been  indicated  that  there  are  many  varia- 
tions from  this  four-step  scheme.  Growers  sell  directly  to  re- 
tailers, jobbers  buy  from  growers  jmd  from  local  shippers, 
and,  finally,  central  market  middlemen  buy  directly  from 
growers  and  often  distribute  directly  to  retailers,  attending 
themselves  to  both  the  concentration  and  dispersion  of  the 
product  to  and  from  the  central  market. 


CHAPTER  V 

MIDDLEMEN  OF  THE  AGRICULTURAL  WHOLESALE 

MARKET 

A  distinction  has  been  made  between  central,  or  terminal, 
wholesale  markets  and  jobbing,  consumption,  or  secondary, 
wholesale  markets.  This  distinction  is  a  matter  of  degree, 
and  the  middlemen  operating  in  each  cannot  be  readily  di- 
vided into  middlemen  of  the  central  market  and  middlemen 
of  the  jobbing  market.  Nevertheless,  just  as  the  principal 
function  of  the  central  market  is  to  collect  produce  from 
country  shippers  and  growers  at  convenient  points  for  later 
dispersion,  and  just  as  the  principal  function  of  the  jobbing 
market  is  to  assemble  for  retailers,  so  there  are  middlemen 
whose  primary  business  is  the  collection  of  products  and  oth- 
ers who  attend  mainly  to  their  dispersion  and  assembly.  In 
fact,  it  is  the  presence  of  these  middlemen  which  makes  the 
market,  and  the  nature  of  their  activities  determines  its  char- 
acter. 

Confused  Nomenclature. — There  is  much  confusion  in  the 
nomenclature  applied  to  thesowholesale  dealers.  Sometimes 
middlemen  known  by  a  certain  name  to  the  trade  are  no 
longer  functioning  in  the  manner  the  name  seems  to  indicate: 
the  same  middlemen  operate  in  different  ways  from  time  to 
time,  and  middlemen,  called  by  different  names  by  the  trade 
may  be  operating  in  the  same  fashion.  It  will,  therefore,  make 
the  discussion  more  readily  understood  to  start  with  the  opera- 
tions and  business  methods  which  are  found,  and  to  pass  from 
these  to  the  classification  and  nomenclature. 

A.  Operations. — There  are  three  important  operations  in 
the  wholesale  market:  (1)  the  concentration  of  products  from 

74 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET 


J 


the  growers  or  country  shippers;    (2)   the  dispersion  of  conll 
centrated  products  to  other  markets,  to  factories,  and  to  re- 
tailers, as  a  part  of  the  function  of  assembly;  and  (3)  specu- 
lation.    Concentration    and    dispersion  have  been  discussed. 
The  speculative  operations  are  performed  by  a  class  of  deal- 
ers who  make  it  their  main  business  to  buy  in  one  wholesale  . 
market  and  ship  or  sell  the  product  in  a  similar  market,  or 
to  resell  on  the  same  market,  wherever  a  chance  for  profit 
from  a  resale  appears.     Buying  and  selling  when  they  believe 
the  price  is  lower  or  higher  than  general  market  conditions 
warrant,  they  serve,  through  their  operations,  to  equalize  the, 
price_and  supply  as  between  vprjnua  prmrlfpt.g  «nH   hpfw^pn  . 
various  seasons  of  the  year. 

There  is,  in  the  wholesale  trade,  one  class  of  dealers,  who 
are  sometimes  called  "receivers,"  which  is  engaged  in  concen- 
trating products  from  the  local  growers'  markets  and  from 
other  wholesale  markets,  foreign  or  domestic._  Another  class 
purchase  from  these  receivers  and  in  turn  disperse  the  product 
to  mills,  factories,  and,  particularly,  to  retailers.  That  is, 
some  dealers  are  engaged  primarily  in  concentration  and  some 
are  engaged  primarily  in  dispersion.  But  there  are  many 
deviations  from  this  practice.  In  fact,  it  is  only  in  the  largest 
markets  that  anything  like  this  distinct  cleavage  is  found.  In 
smaller  markets  the  goods  pass  directly  from  the  receiving 
dealer  to  the  retailer  or  manufacturer.  That  is,  the  same  mid- 
dleman is  engaged  in  concentration  and  in  dispersion  and  as- 
sembly. Nevertheless,  many  of  the  products  which  the  mid- 
dlemen of  these  smaller  markets  handle  are  bought  by  them 
from  the  large  central  markets.  In  so  far  as  this  is  true,  this 
distinction  between  receivers  and  those  who  disperse  is  main- 
tained, but  the  concentrating  middleman  and  the  assembling 
middleman  are  located  in  different  market  places,  and  often 
in  different  cities. 

Again,  certain  wholesale  markets  are  engaged  more  largely 
than  others  in  dispersing  products  which  have  been  concen- 
trated there  for  the  purpose  of  redistribution  to  other  points, 


76  PRINCIPLES  OF  MARKETING 

and  some  are  engaged  chiefly  in  concentrating  products  for 
local  distribution.  In  the  same  city  the  former  type  of  ac- 
tivity will  predominate  with  products  concentrated  from  the 
surrounding  producing  areas  for  which  it  serves  as  a  primary 
market,  and  the  other  will  prevail  for  products  which  are 
shipped  in  for  consumption  from  areas  not  geographically 
tributary.  The  differentiation  between  middlemen  who  con- 
centrate and  those  who  disperse  has  developed  because  it 
usually  proves  more  effective  and  more  economical  for  a  mid- 
dleman to  specialize.1  The  many  deviations  from  this  prac- 
tice indicate,  nevertheless,  that  it  is  far  from  generally  recog- 
nized as  essential.  In  fact,  an  individual  dealer  seldom  con- 
fines himself  exclusively  to  one  or  the  other  kind  of  operation. 
The  middleman  of  the  jobbing  market  may  buy  most  of  his 
products  from  a  receiver  at  the  central  market,  but  if  oppor- 
tunity offers  he  does  not  hesitate  to  go  over  the  latter's  hea,d 
to  the  country  shipper  or  even  to  the  producer,  sometimes 
contracting  for  products  before  the  growing  season  begins. 

1  It  is  of  interest  that  the  scale  of  operations  in  the  produce  market 
continues  small.  "The  growth  of  larger  organizations  in  the  produce 
business  has  not  brought  about  a  proportionate  increase  in  the  size  of 
the  operating  unit  in  Chicago.  It  has  not  given  us  enormous  local  con- 
cerns standing  out  in  the  business  as  Marshall  Field  and  Sears,  Roebuck 
do  in  their  respective  spheres,  and  financially  capable  of  building  for 
themselves  the  plant  which  would  give  them  the  maximum  of  technical 
efficiency.  The  point  is,  of  course,  that  the  big  produce  business  grows 
by  enlarging  its. contacts  with  many  producing  and  many  consuming 
points,  and  its  life  and  growth  are  based  upon  constant  and  personal 
direction  by  men  intimately  and  somewhat  permanently  connected  with 
these  diverse  local  situations.  It  does  not  admit  of  being  reduced  to  a 
routine,  which  can  then  be  multiplied  into  a  great  establishment,  but 
must  remain  a  network  of  small  and  personal  places  of  business.  Ap- 
parently there  are  fairly  definite  limits,  under  present  conditions,  to  the 
advantages  to  be  gained  by  increasing  the  scale  of  operations  beyond  a 
certain  point.  It  is  extremely  doubtful  that  Chicago  dealers  will  ever 
be  in  a  position  to  furnish  themselves  with  a  really  adequate  equipment. 
They  must  look  to  the  railways,  the  cold-storage  companies,  special 
terminal  corporations,  or  to  the  city  government." — E.  G.  Nourse,  The 
Chicago  Produce  Market  (1918),  pp.  114-115. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET    77 

The  receiver  in  turn  may  sell  chiefly  to  jobbers,  but  does  not 
hesitate  to  sell  to  retailers  if  a  suitable  opportunity  offers. 

This, failure  for  clear  lines  of  demarkation  to  develop  be- 
tween classes  of  dealers  is  one  of  the  features  of  the  distri- 
bution of  farm  products  which  distinguishes  it  particularly, 
from  that  of  manufactured  goods.  With  manufactured  prod- 
ucts there  is  a  distinct  tendency  for  middlemen  to  confine 
themselves  to  particular  types  of  operation.  Any  departures 
therefrom  are  commented  on  by  the  trade,  and  frequently  lead 
to  trade  "wars"  upon  such  "irregular"  dealers.  Nothing  of 
the  kind  is  found  in  the  farm  market.  The  conditions  under 
which  farm  products  are  marketed  vary  so  from  point  to 
point,  there  are  so  many  channels  of  distribution  open  to  the 
grower  and  so  many  types  of  sale  are  found,  that  methods 
change  constantly.  Furthermore,  because  market  prices  con- 
tinually fluctuate  and  many  products  quickly  deteriorate,  speed 
is  important;  and  so  there  is  no  inclination  on  the  part  of 
farmers,  dealers,  or  consumers  to  confine  themselves  to  so- 
called  "regular"  methods  of  exchange. 

Specialization  of  Middlemen  by  Products.— There  is  also  a 
tendency  for  middlemen  to  specialize  in  the  distribution  of 
single  products  or  classes  of  products.  In  the  larger  markets 
there  seems  to  be  a  fairly  distinct  cleavage  between  middlemen 
handling  the  following  classes  of  products:  meat,  fish  and  sea 
food,  grain,  cotton,  wool,  tobacco,  fresh  fruits  and  vegetables, 
dairy  and  poultry  products,  and  the  like.  Even  at  local  ship- 
ping points  and  in  the  smaller  markets  there  is  a  tendency 
to  such  specialization.  So  many  middlemen  operate,  however, 
in  several  of  these  lines  that  this  should  be  looked  upon  simply 
as  a  general  tendency.2 

B.  Business  Relations. — In  Chapter  I  a  distinction  was 
drawn  between  merchants  and  functional  middlemen  of  ex- 

8  This  situation  in  the  produce  trades  is  discussed  in  the  Report  of  the 
Federal  Trade  Commission  on  the  Wholesale  Marketing  of  Food,  pp. 
27-30.  See  also  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products,  pp. 
14-16. 


78  PRINCIPLES  OF  MARKETING 

change.  This  classification  is  based  upon  the  business  rela- 
tionship existing  between  the  dealer  and  his  customer.  The 
merchant  is  the  actual  jowner_flf  the  goods  he  deals  in,  and 
as  such  bears  all  of  the  risks  and  responsibilities  of  owner- 
ship. His  profits  result  from  his  own  trading.  The  func- 
tional dealer  does  not  own  the  merchandise  and  -does  not  bear 

i, 

the  risks  of  ownership,  but  represents  the  buyer  or  the  seller 
and  is  paid  by  him  for  his  efforts  in  his  behalf.  It  is  com- 
mon for  the  same  middleman  to  operate  in  both  ways. 

(1)  Commission  dealing. — Those  middlemen  who   act  as 
intermediaries  between  country  shippers  and  buyers  in  the 
central  market  are  called   commission  merchants — although 
they  are  not  merchants — or  commission  men,  in  the  sale  of 
grain,  live  stock,  fruits  and  vegetables.     They  are  called  fac- 
tors in  the  raw  cotton  trade,  and  merely  buyers  in  some  trades. 
They  normally  act  for  the  grower  or  country  shipper  in  the 
terminal  market  and  neither  buy  nor  sell  on  their  own  account. 
Sometimes  they  represent  buyers  rather  than  sellers.     Their 
primary  service  is  to  know  the  markets  in  which  their  clients' 
products  can  be  best  disposed  of.     They  are  paid  a  fee  or  a 
commission  for  their  services.     Dealers  usually  operating  on 
a  commission  ba~sis  frequently  buy  and  sell  on  their  own  ac- 
count.    When  doing  so,  they  are,  of  course,  not  acting  in  the 
capacity  of  commission  men. 

(2)  Outright  purchase. — Dealers  who  buy  outright  are  not 
clearly  distinguished  in  the  nomenclature  of  the  central  market. 
Those  whose  chief  function  is  to  collect   from  the  growing 
areas  are  variously  called  "wholesale  receivers,"  "wholesalers," 
— a  term  which  is  likewise  applied  to  all  dealers  in  the  central 
wholesale  market — "car-lot  receivers",   and   "jobbers."     The 
term  "wholesale  receiver"  best  expresses  the  function  involved, 
is  less  liable  to  confusion  than  is  the  term  "wholesaler,"  and  is 
preferable  to  the  term  "car-lot  receiver,"  because  it  is  less  re- 
stricted in  its  apparent  meaning.  As  the  jobber's  operations  are 
commonly  considered  to  be  confined  to  the  assembly  of  prod- 
ucts for  sale  to  retailers,  the  term  "jobber"  is  unsatisfactory. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET     79 

The  term  "wholesale  receiver"  is  not  only  the  best,  but  it  has 
already  been  introduced  into  the  scientific  literature  of  the 
subject.3  Consequently,  it  will  be  used  here. 

Among  the  members  of  the  trade  and  in  popular  discussions 
the  term  "commission  man"  is  frequently  used  to  include 
both  the  middlemen  who  actually  work  on  a  commission 
basis  and  those  who  buy  and  sell  on  their  own  account.  This 
confusion  is  easily  explained.  In  sending  products  from 
distant  growers'  markets  to  the  terminal  market  the  first 
method  to  develop  has  usually  been  the  commission  method. 
For  reasons  which  will  be  mentioned  presently  there  often  fol- 
lows a  gradual  change  of  method  on  the  part  of  certain  deal- 
ers.4 They  begin  to  buy  and  sell  outright  and  may  come  in 
time  to  deal  entirely  on  such  a  basis.  But  they  continue  to 
call  themselves  commission  men  and  to  be  known  as  such. 
Despite  this  confusion  of  terms  and  of  practice  the  two 
methods  are  distinct  and  are  recognized  as  distinct  in  the  trade. 
Consequently  it  is  feasible  to  organize  a  nomenclature  on 
this  basis:  a  nomenclature  which,  moreover,  conforms  closely 
with  trade  usage  as  well  as  with  that  already  adopted  by 
students  of  agricultural  marketing. 

/  Commission  Dealing. — The  usual  business  of  the  commis- 
sion man  is  to  receive  goods  directly  from  the  country.  He 
does  not  buy,  but  endeavors  to  sell  for  his  country  client, 
usually  in  the  terminal  market  in  which  he  is  located.  Thus 
in  the  cattle  trade  the  stockman  or  country  buyer  will  con- 
sign a  car  or  more  of  cattle  to  the  commission  man.  When 
the  shipment  arrives  at  the  central  market,  the  commission 
man  takes  complete  charge.  (1)  The  cattle  are  divided 
roughly  into  groups,  which  conform  to  the  demands  of  the 
buyers,  after  which  they  are  driven  into  enclosures  and  the 
commission  man,  as  the  representative  of  the  seller,  has  com- 
plete power  (2)  to  sell  the  cattle  and  (3)  to  collect  the  pro- 
ceeds for  his  client.  After  the  stock  is  sold  the  commission 

3  See  Weld,  op.  cit.,  p.  80. 

4  See  pp.  81-84. 


80  PRINCIPLES  OF  MARKETING 

man  deducts  the  costs  which  he  has  paid,  such  as  freight,  feed 
for  the  stock,  insurance  charges  where  they  are  involved,  and 
yardage  and  inspection  fees,  as  well  as  his  own  commission 
for  selling.  He  is  usually  paid  a  sum  which  is  a  percentage 
of  the  total  sales  or  which  is  made  up  of  a  certain  charge  per 
unit  sold.5  The  details  which  determine  the  amount  and  the 
nature  of  the  deductions  for  costs  and  services  by  the  com- 
mission man  have  usually  been  determined  in  advance  by 
agreement  between  the  receiver  and  his  customer  or  by  the 
established  rules  of  the  trade. 

Some  tjme  necessarily  elapses  between  the  shipment  and 
the  sale  of  the  goods,  and  many  shippers  are  unable  or  un- 
willing to  wait  for  their  money  until  the  returns  would  natur- 
ally reach  them.  It  is  the  custom  in  some  trades,  conse- 
quently, for  the  receiver  to  advance  a  certain  proportion  of 
the  estimated  value  of  a  shipment  at  the  time  it  is  sent.  Cot- 
ton factors,  for  instance,  frequently  store  cotton  for  shippers 
who  are  not  ready  to  sell  and  advance  money  on  the  stored 
cotton.6  This  is  in  the  nature  of  a  loan  on  suitable  security, 

6  These  commissions  range  for  different  products  between  one  and 
fifteen  per  cent  of  the  selling  price.  The  charge  is  usually  less  for  car 
lots  and  a  higher  commission  is  charged  for  the  sale  of  the  more  perish- 
able, products  and  for  products  for  which  no  central  market  places  exist 
in  which  buyers  and  sellers  come  together.  Goods  bought  in  bulk  are 
sold  on  a  higher  commission  than  those  purchased  by  grade  or  sample. 

6  They  sometimes  do  more.  Thus,  "It  is  an  established  custom  for 
him  [the  cotton  factors  about  Memphis,  Tennessee]  to  advance  to  the 
grower  money  to  enable  the  latter  to  plant,  cultivate,  and  gather  his 
crop,  such  advances  usually  being  made  upon  the  basis  of  $15  per  bale 
on  the  number  of  bales  which  the  grower  contracts  to  deliver  to  the 
factor.  Upon  advances  so  made  the  factor  charges  interest  at  the  rate 
of  8  per  cent.  When  the  cotton  has  been  ginned  and,  in  accordance  with 
the  contract,  delivered  to  the  factor,  the  latter  sells  it  and  in  settlement 
with  the  grower  deducts  his  8  per  cent  interest  on  money  advanced,  a 
commission  of  2l/2  per  cent,  and  expenses  consisting  usually  of  freight 
charges,  drayage,  storage,  and  insurance.  Where  all  these  charges  attach 
to  the  handling  of  a  bale  of  cotton  by  the  Memphis  factor  the  average, 
it  is  said,  amounts  to  approximately  $3  per  bale.-' — Interstate  Commerce 
Commission  Reports,  Vol.  XXVI  (1913),  p.  590. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET    81 

although  the  understanding  is  that  the  factor  will  eventually 
sell  the  goods  for  his  client.  When  final  payment  is  made 
the  factor  deducts,  among  other  things,  interest  on  the  money 
advanced.  Local  shippers  of  grain  commonly  draw  drafts  on 
the  purchaser  for  the  full  amount  of  the  sale.  In  other  cases, 
particularly  when  selling  through  commission  men,  they  are 
allowed  to  draw  up  to  a  certain  percentage  of  the  estimated 
price. 

*>Rise  of  Outright  Purchase  from  Commission  Dealing. — 
The  commission  method  of  dealing  is  almost  always  found 
when_marketjng  is  crude  and  undeveloped,  when  goods  vary 
in  quality,  variety,  and  method  of  packing^  when  transporta- 
tionTlacilities  are  slow  and  not  dependable,  and  when  market 
news  is  inadequate.  Under  such  conditions  dealers  are  usually 
unwilling  to  undertake  the  risk  of  buying  the  product  outright. 
If  they  do  buy  they  must  pay  a  price  low  enough  to  offset  the 
risk  involved.  The  shipper,  consequently,  is  likely  to  prefer 
to  bear  that  risk  himself  for  the  chance  of  the  higher  price 
he  may  obtain  through  consignment.  But  as  these  conditions 
improve,  as  producers  begin  to  specialize  and  to  produce  prod- 
ucts of  more  uniform  variety  and  perhaps  to  grade  them  by 
quality  .and  variety;  as  transportation  systems  develop  so  that 
schedules  can  be  depended  upon,  and  the  speed  of  trains  in- 
creases; as  refrigerator  cars  and  other  special  equipment  be- 
come adequate;  as  news  of  the  needs  of  the  market  and  of 
available  supplies  comes  to  be  more  accurate  and  more  readily 
obtained — the  risks  en  route  and  at  the  central  market  grow 
less,  and  consequently  the  possibility  of  outright  purchase 
by  the  dealers  located  there  becomes  greater.  But  such  im- 
proved conditions  make  outright  purchase  only  more  probable; 
they  do  not  cause  it  to  develop. 

Among  the  causes  that  may  compel  the  change  from  con- 
signment to  outright  purchase  are  the  conditions  in  the  trade 
and  the  demand  of  shippers  to  be  relieved  of  risk.  *  Shippers 
very  largely  oppose  the  consignment  method,  or  are  suspicious 
of  it,  particularly  when  the  scarcity  of  market  news  makes 


82  PRINCIPLES  OF  MARKETING 

them  unable  to  follow  the  market  closely,7  or  when  they  grow 
products  which  are  likely  to  deteriorate  before  they  reach  the 
market,  or  which  fluctuate  greatly  in  price.  They  are  likely 
to  feel  that  they  are  not  getting  the  top  price,  or  that  the 
dealer's  deductions  for  grading,  packing,  or  for  unsalable  prod- 
ucts are  too  great — that  the  commission  man  is  not  dealing 
fairly  with  them.8  They  are  more  than  likely,  consequently, 
to  patronize  a  dealer  who  will  offer  to  purchase  outright  at 
the  market  price.  This  relieves  them  of  the  necessity  of 
waiting  for  the  returns  and  of  the  uncertainty  and  risk  con- 
nected therewith.  On  the  other  hand,  as  the  central  market 
dealers  are  in  the  best  position  to  know  the  needs  of  the  market 
they  sell  in,  and  as  they  gain  individual  experience  and  as 
market  conditions  improve,  they  reach  a  place  where  they 
are  in  a  position  to  bear  the  risks  of  merchanting  and,  in 
order  to  gain  any  increased  trading  profits  which  may  result, 
prefer  to  operate  that  way.  It  is  possible,  also,  that  the  in- 
creased interest  of  the  dealer  who  has  his  own  funds  invested 
in  the  goods  causes  him  to  operate  more  effectively.  Further- 
more, since  he  is  located  in  the  central  market,  he  is  in  a  better 
position  to  determine  market  trends  and,  consequently,  ta 
carry  the  market  risks. 

These  facts,  coupled  with  the  competition  of  commission 
men  among  themselves  and  with  other  classes  of  dealers  for 
products  to  handle,  or  with  which  to  supply  their  established 
trade,  have  undoubtedly  been  important  in  bringing  about  a 
change.  Thus,  in  the  produce  trade,  in  order  to  procure  just 
the  kind  and  quality  of  products  they  require,  the  jobbers 
have  often  gone  over  the  heads  of  the  receiving  middlemen 
and  have  themselves  bought  directly  from  the  producer  or 
country  shipper,  paying  cash.9  This  has  sometimes  forced 

7  See  Report  of  the  Federal  Trade  Commission  on  the  Wholesale 
Marketing  of  Food,  pp.  4(H42. 

8 See  E.  G.  Nourse,  The' Chicago  Produce  Market,  pp.  55  ff. 

9  Nourse,  op.  cit.,  p.  51  ff.,  and  Report  of  the  Federal  Trade  Commis- 
sion on  the  Wholesale  Marketing  of  Food  (1920),  pp.  52-53. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET     83 

the  commission  man  to  meet  not  merely  the  competition 
of  other  wholesale  receivers  but  to  contend  with  that  of  the 
jobbers  as  well.  Again,  in  order  to  be  assured  of  the  kind  of 
produce  wanted  receivers  are  often  forced  to  get  products  'from 
distant  sources  and  are  compelled  not  merely  to  pay  cash, 
but  even  to  guarantee  a  certain  price  before  the  growers  will 
plant  the  crop.  This  is  because  the  latter  are  unwilling  to 
take  the  risk  of  that  particular  crop  and  its  prospects  in  the 
distant  market.  Moreover,  in  time  of  shortage  in  his  normal 
field  of  supply  the  dealer  may  need  to  enter  growing  sec- 
tions in  which  he  does  not  ordinarily  buy,  and  to  the  growers 
of  which  he  is  not  known.  To  compete  with  established 
houses  he  may  be  forced  to  pay  cash.  Sometimes  the  com- 
mission man  has  sold  the  greater  part  of  a  shipment  on  a 
commission  basis,  and  rather  than  hold  up  the  payment  of 
the  shipper  until  it  is  sold  he  buys  the  remainder  himself. 
Finally,  as  particular  dealers  gain  in  financial  power  and 
are  able  as  a  result  of  increased  reputation  with  banking 
houses  to  borrow  funds,  they  become  able  to  carry  on  their 
business  on  this  basis,  whereas  before  these  fortunate  condi- 
tions arise  they  must  operate  on  a  commission  basis,  in  which 
less  capital  is  required. 

Both  Business  Relations  Prevail  in  Most  Lines. — Any  of 
these  causes  may  lead  to  outright  purchase,  and  temporarily, 
at  least,  tend  to  confuse  business  methods.  For  during  this 
change  it  is  evident  that  both  business  relationships  are  likely 
to  prevail  in  the  same  market  and  to  be  used  by  the  same 
merchants.  Likewise,  the  limited  financial  resources  of  new 
dealers  coming  into  the  field  tend  to  perpetuate  commission 
dealing.  In  most  trades  the  two  methods  are  found  side  by 
side,  and  the  consignmrnt  nnlr  in  by  nn  means  losing  ground 
in  all  trades.  Thus  in  the  cattle  industry,  the  commission 
method  prevails  almost  entirely.  Because  of  the  continuous 
market  for  live  stock,  its  excellent  organization,  and  the  knowl- 
edge which  shippers  have  of  the  market,  and  because  of 
the  efforts  which  have  been  made  by  the  dealers'  associations 


84  PRINCIPLES  OF  MARKETING 

to  prevent  sharp  practices,  this  method  appears  to  continue 
to  give  satisfaction,  and  the  demand  for  change  has  not  been 
great  enough  to  bring  it  about.  Well  over  two-thirds  of  the 
grain  sold  by  country  dealers  is  consigned  for  similar  rea- 
sons,10 and  in  periods  in  which  prices  are  fluctuating  greatly, 
or  when  the  grain  of  a  particular  section  is  of  very  poor 
quality,  dealers  who  ordinarily  buy  may  be  -unwilling  to 
chance  the  extraordinary  risks  which  these  conditions  cause 
and  so  simply  operate  on  a  commission  basis  for  the  time 
being. 

It  seems  that  the  continuance,  side  by  side,  of  these  two 
methods  may  prove  a  protection  to  the  growers,  because  they 
can  utilize  whichever  method  suits  them  best,  and  the  com- 
petition between  the  two  classes  of  dealers  tends  to  obtain* 
good  service  from  the  commission  dealers  and  good  prices 
from  the  merchants. 

Outright  Purchase:  The  Wholesale  Receiver. — Large 
quantities  of  products  are  now  bought  outright  by  merchants 
in  central  markets.  It  is  to  such  merchants  that  we  here 
apply  the  term  "wholesale  receiver,"  although  the  trade  is 
likely  to  continue  to  call  them  "commission  men"  l«hg  after 
they  have  ceased  to  operate  on  a  commission  basis.  The  main 
function  of  both  wholesale  receivers  and  commission  men 
is  to  concentrate  the  products  from  country  shipping  points 
at  the  terminal  markets.  Thewjiolesale  receiver,  in  buying 
outright,  bears  all  the  risk  of  marketing  the  product  after 
it  leaves  the  country  shipping  point;11  when  the  dealer  works 
on  a  commission  basis,  the  shipper  bears  the  risks. 

Because  of  the  uncertainties  involved  it  seems  that  the  out- 
right purchaser  would  require  a  larger  profit  than  that  re- 
quired by  the  commission  dealer  in  the  same  trade.  Probably 

10  Report  oj  the  Federal  Trade  Commission  on  the  Grain  Trade,  Vol.  I, 
pp.   144-145. 

11  In  the  case  of  sales  in  which  the  price  is  determined  by  the  market 
price  on  the  day  of  arrival,  the  dealer's  risk  begins  on  arrival. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET     85 

this  is  true.  But  facts  are  not  available  for  proving  the  case, 
and  the  following  statement  concerning  the  grain  trade  is  of 
interest: 

"Grain  jobbing  is  a  precarious  business.  Several  grain  jobbers 
suggested  that  in  considering  the  jobber's  profits  attention  should 
be  called  to  the  fact  that  about  10  per  cent  of  the  grain  jobbers 
fail  in  business  each  year.  The  average  profit  of  a  grain  jobber 
is  about  1  cent  per  bushel  on  wheat  handled,  depending  on  the 
volume  of  his  business,  his  knowledge  of  the  market,  and  the 
movement  of  prices.  As  he  is  performing  practically  the  same 
function  as  the  commission  man  he  can  not  expect  to  make  on  the 
average  much  more  than  the  commission  man,  who,  as  stated, 
receives  uniformly  1  cent  per  bushel  for  his  services  in  the  grain 
exchanges."  1 

The  Broker. — The  broker  is  another  receiver  who  operates 
in  much  the  same  manner  as  does  the  commission  merchant, 
except  that  he  more  frequently  represents  buyers  in  the  cen- 
tral market  than  does  the  commission  man,  and  seldom  rep- 
resents growers  or  country  shippers.  He  usually  handles  goods 
in  larger  lots,  performs  fewer  functions,  exercises  fewer  pow- 
ers, and  so  works  for  a  smaller  fee  than  does  the  commission 
man.  Usually  the  broker  merely  gets  in  touch  with  the 
market  sources  for  his  principal  and  then  must  confirm  prices 
and  conditions  of  the  contract  before  he  can  act;  his  powers 
of  representation  for  his  client  are  thus  not  usually  so  broad 
as  are  those  of  the  commission  man.  His  main  function  is 
to  bring  buyer  and  seller  together. 

When  a  broker  represents  a  shipper  he  is  sometimes  called 
a  shipper's  representative.  But  the  shipper's  representative 
does  not  always  sell;  often  his  duties  are  to  inspect  the  ship- 
per's products  when  they  arrive  at  the  central  market,  the 
selling  being  left  to  other  agencies.  As  many  shippers'  repre- 
sentatives work  for  salaries,  it  is  evident  that  they  are  not 

"United  States  Bureau  of  Labor  Statistics,  No.  130  (1914),  (Retail 
Prices  and  Cost  of  Living  Series,  No.  9),  Wheat  and  Flour  Prices  from 
Farmer  to  Consumer,  p.  29. 


86  PRINCIPLES  OF  MARKETING 

true  brokers.13  Transactions  on  produce  exchanges  are  com- 
monly made  through  brokers. 

Inasmuch  as  some  dealers  called  "brokers"  perform  more 
functions  and  exercise  more  powers,  and  as  some  commission 
men  perform  fewer  functions  and  exercise  fewer  powers,  than 
are  here  indicated,  it  is  frequently  difficult  to  classify  individ- 
ual firms.  The  two  types  shade  almost  imperceptibly  into  one 
another. 

The  Jobber. — The  main  business  of  the  jobber  is  to  assemble 
goods  for  retailers.  In  order  to  be  supplied  with  the  prod- 
ucts which  his  trade  demands,  the  jobber  is  on  the  constant 
lookout  for  any  source  of  supply  that  will  give  him  the  de- 
sired products  of  the  proper  quality  and  quantities,  at  the  time 
wanted  and  at  the  lowest  price.  But  although  he  is  con- 
stantly on  the  lookout  for  the  best  source  of  supply,  most  of 
his  purchases  are  made  from  receivers  in  the  central  market. 
This  is  particularly  true  in  the  case  of  products  coming  from 
a  distance,  and  such  products  are  usually  in  the  great  ma- 
jority. Even  crops  grown  locally,  such  as  fruits  and  vege- 
tables, can  usually  supply  the  local  market  for  but  part  of 
the  season.  Before  and  after  the  local  season  they  must 
be  imported  from  sections  in  which  the  crops  mature  earlier 
and  later.  It  is  true  of  practically  all  markets  that  but  few 
of  the  products  they  consume  are  grown  locally  and  that  when 

13  The  term  "broker"  is  also  applied  in  the  fruit  trade  to  local  repre- 
sentatives of  wholesale  receivers  and  commission  houses  who  go  to  the 
country  shipping  points  and  buy  or  take  on  consignment  for  their  houses 
the  products  of  the  growers.  They  usually  work  on  a  commission  basis, 
the  commission  being  paid  by  the  house  they  represent.  The  term 
"solicitor"  is  also  applied  to  these  local  representatives  of  terminal  mar- 
ket middlemen,  particularly  when  they  work  on  a  salary  basis.  The 
work  of  such  middlemen  must  not  be  confused  with  that  of  the  dealer 
here  described. 

The  broker  of  the  fruit  and  vegetable  trade  is  described  in  J.  H. 
Collins,  J.  W.  Fisher,  Jr.,  and  Wells  A.  Sherman,  Methods  of  Wholesale 
Distribution  of  Fruits  and  Vegetables  on  Large  Markets,  U.  S.  Depart- 
ment of  Agriculture,  Bui.  No.  267  (1915),  pp.  11-14. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET    87 

so  grown  the  supply  is  frequently  insufficient  even  during  the 
height  of  the  season.14 

Jobbers  do  not  usually  confine  themselves  to  a  single  source 
of  supply  but  depend  now  on  one  source,  now  on  another. 
Thus,  produce  jobbers  in  some  of  the  outlying  markets  in  the 
city  of  Chicago  buy  much  of  their  produce  directly  from  the 
central  market  on  "South  Water  Street";  others,  however,  buy 
from  growers,15  and  either  may  buy  from  time  to  time  from 
the  other  source.  Jobbers  in  the  smaller  cities  likewise  buy 
both  from  nearby  and  distant  growers  and  from  receivers  in 
central  markets. 

The  Auction  Company. — An  agency  of  considerable  impor- 
tance in  the  distribution  of  perishable  products  at  central 
markets  is  the  auction  company!  Thelfunction  of  an  auction 
company  is  to  furnish  a  place  and  a  business  mechanism 
through  which  perishable  products  shipped  from  great  dis- 
tances in  large  quantities  can  find  an  immediate  market.  The 
company  supplies  a  building  to  which  the  goods  are  taken 
and  in  which  samples — called  "parts  of  marts" — can  be  dis- 
played. A  daily  catalogue  is  printed  naming  the  goods  offered 
for  sale  on  that  day,  and  auctioneers  are  provided.  Sales 
are  made  on  the  basis  of  samples  representing  each  lot  of 
goods.  After  the  sales  are  made  the  company  attends  to  the 
collection  and  remittance  of  the  proceeds.  The  auction  com- 
pany represents  the  shipper  and  sells  for  hinvop-rather  iorjtke* 
wholesale  receivers  and  commission  men  who  handle  the  ship- 
pers' produce  in  the  central  market;  and  the  buyers  or  their 
direct  representatives  are  there  to  bid  on  the  goods  as  they 
are  offered  for  sale.  Only  wholesale  middlemen  are  usually 

14  It  has  been  estimated  that  not  over  5  per  cent  of  the  produce  con- 
sumed in  the  New  York  area  is  grown  within  the  trucking  radius  (50 
miles).    Report  of  the  Federal  Trade  Commission  on  the   Wholesale 
Marketing  of  Food,  pp.  202-203.    See  also  L.  D.  H.  Weld,  "The  Food 
Supply  of  the  Iron  Range"  in  Weld  and  Others,  Studies  in  the  Market- 
ing of  Farm  Products;  Studies  in  the  Social  Sciences,  No.  4,  University 
of  Minnesota  (1915),  p.  109. 

15  See  E.  G.  Nourse,  The  Chicago  Produce  Market,  pp.  14-26. 


88  PRINCIPLES  OF  MARKETING 

represented  as  sellers  at  such  sales,  although  at  times  large 
shippers  are  present.  Jobbers  are  the  chief  purchasers,  but 
regular  retailers  and  such  venders  as  hucksters  and  push  cart 
men  sometimes  buy.  The  fees  for  the  services  of  the  auction 
companies  usually  consist  of  a  commission  charge  to  the 
seller.16 

Middlemen  Who  Speculate  on  Quick  Price  Changes. — 
The  middlemen  thus  far  discussed  are  mainly  engaged  in  con- 
centration or  dispersion.  A  third  group  operates  mainly  in 
the  central  market.  Middlemen  of  this  kind  seldom  hold 
products  for  long,  but  make  it  their  business  to  watch  prices 
carefully  for  a  chance  to  make  speculative  profits  from 
rapid  transactions.  When  prices  are  lower  than  they  believe 
conditions  warrant,  they  buy,  selling  later  at  the  advanced 
price,  in  case  they  have  properly  judged  the  market.  Or  they 
buy  in  one  market  when  prices  are  a  little  lower  than  in 
another  and  sell  quickly  in  the  other  market  before  prices 
have  again  become  equalized.  Their  profits  on  individual 
sales  are  usually  small,  the  very  nature  of  their  ^business  tend- 
ing to  keep  the  markets  in  close  adjustment.  For  when  the 
price  in  general  or  prices  in  a  given  market  get  out  of  line 
their  purchases  and  sales  tend  to  bring  prices  back  to  normal, 
and  hence  to  eliminate  entirely  the  chance  of  profit  from  such 
transactions.  Operations  of  this  kind  are  mainly  speculative, 
but  they  serve  to  keep  prices  at  a  point  near  to  that  which 
market  conditions  seem  to  warrant.  This  helps  to  keep  large 
dealers  from  forcing  prices  up  or  down  and  to  prevent  extreme 
price  fluctuations.17 

Functional  Specialists. — There  are  other  market  agencies 
highly  specialized  by  function.  It  has  been  shown  that  mar- 

16  Detailed  discussions  of  auctions  will  be  found  in  L.   D.  H.  Weld, 
The  Marketing  of  Farm  Products,  pp.  53-55,  124-141;   E.  G.  Nourse, 
Chicago  Produce  Market,  pp.  32-38;  Report  of  the  Federal  Trade  Com- 
mission on  the  Wholesale  Marketing  of  Food,  pp.  56-59.    In  Europe 
many  raw  materials,  such  as  wool  and  rubber,  are  auctioned.    Wool  is 
sometimes  sold  at  auction  in  the  United  States. 

17  See  pp.  372-375  and  440-443. 


MIDDLEMEN  OF  THE  WHOLESALE  MARKET     89 

keting  consists  mainly  of  buying  and  selling  and  of  the 
processes  of  transportation  and  storage.  The  middlemen  so 
far  discussed  have  dealt  mainly  with  buying  and  selling  and 
in  so  far  as  they  have  carried  or  stored  goods  it  has  been  inci- 
dental to  that  function.  But  there  are  agencies  which  spe- 
cialize entirely  in  transportation,  storage,  risk-taking,  and 
financing.  These  are  not  middjbmen  according  to  the  classi- 
fication of  Chapter  I.  Theye^rform  services  which  buyers  and 
sellers  would  otherwise  h^ve  to  perform,  just  as  the  producer 
and  the  consumer  "would  have  to  attend  to  all  the  details  of 
buying  and  selling  if  there  were  no  middlemen.18 

"Examples  have  already  been  given  in  Chap.  I,  and  need  not  be 
mentioned  again  at  this  point.  It  will  also  be  unnecessary  to  discuss 
now  the  retailer  of  agricultural  products,  for  the  retailing  of  farm  prod- 
ucts is  so  similar  to  the  retailing  of  other  products  that  it  can  be  left 
for  later  consideration. 


CHAPTER  VI 
MARKETING  RAW  MATERIALS 


The  three  preceding  chapters  dealt  with  the  marketing  of 
farm  products,  whether  used  as  raw  materials  or  foods.1 
This  chapter  will  consider  the  marketing  of  raw  materials, 
as  illustrating  the  marketing  of  production  goods.  Every 
manufacturer  has  both  a  buying  and  a  selling  problem;  and 
this  chapter  treats  what  is  perhaps  the  most  important  part 
of  the  former — the  purchase  of  raw  materials.2  The  problems 
involved  in  marketing  semi-manufactured  production  goods 
will  not  be  specifically  discussed.  But  the  omission  is  not 
.gerious,  since,  from  the  point  of  view  of  the  purchasing  manu- 
facturer, the  problems  are  similar  to  those  mentioned  in  this 
chapter,  and  the  problems  of  the  selling  manufacturer  are  dis- 
cussed in  later  chapters. 

Small  Scale  Production  of  Raw  Materials. — Raw  mate- 
rials are  the  products  of  the  farm,  forest,  mine,  and  sea  before 
they  undergo  the  manufacturing  processes  which  prepare  them 
for  use.  Such  materials  are  used  in  large  quantities  by  in- 
dividual manufacturing  plante,  but  they  are  ordinarily  pro- 

1  Foodstuffs  when  they  are  to  be  preserved,  packed,  canned,  dried,  or 
otherwise  processed  on  a  commercial  basis  will  be  considered  as  raw 
materials;  after  those  processes  have  been  completed,  they  will  be  con- 
sidered as  manufactured  products. 

aOn  the  general  subject  consult  Arthur  E.  Swanson,  ''Determining  the 
Purchasing  Policy,"  Administration,  Vol.  2,  No.  5  (Nov.,  1921),  pp. 
616-622;  H.  B.  Twyford,  Purchasing  (1919),  and  Charles  S.  Rindsfoos, 
Purchasing  (1915). 

90 


MARKETING  RAW  MATERIALS  91 

duced  and  extracted  from  nature  on  a  small  scale.  Further- 
more, the  sources  of  raw  materials  are  often  at  a  great  distance 
from  individual  factories  and  the  centers  of  manufacture. 
'Such  products  must,  consequently,  be  collected  from  small 
producers  and  concentrated  in  manufacturing  centers  and 
at  manufacturing  plants.  Farm  products  in  particular — 
fruits,  vegetables,  grains,  sugar  beets  and  sugar  cane,  tobacco, 
coffee,  forage  crops,  cotton,  rubber,  wool,  live  stock — are  pro- 
duced on  a  small  scale  by  thousands  of  independent  growers. 
Even  a  large  plantation  is  small  scale  when  compared  with 
a  modern  factory.  Among  the  extractive  industries,  such  as 
mining,  lumbering,  fishing,  large  scale  operation  is  more  com- 
mon. But  even  here  a  large  volume  of  the  total  production 
is  small  scale. 

Transportation  Problem. — Transportation  costs  usually  de- 
termine whether  materials  will  move  to  the  factory  in  their 
crude  state,  or  whether  there  shall  be  at  least  a  degree 
of  processing  at  the  source.  The  location  of  factories  at  a 
considerable  distance  from  the  source  of  their  raw  materials 
is  a  common  phenomenon.3  But,  in  the  case  of  very  bulky 
products,  of  products  in  which  there  is  a  large  percentage 
of  waste,  and  of  products  extracted  on  a  large  scale,  a  rough 
processing,  or  even  complete  processing,  may  take  place  be- 
fore the  product  is  moved  very  far  toward  its  place  of  ulti- 
mate consumption.  Lumber  mills,  for  example,  are  usually 
located  at  the  forests,  although  the  furniture  and  houses  made 
therefrom  are  constructed  and  manufactured  far  away  in  the 
centers  of  consumption  and  manufacture.  This  is  the  case 
because  the  market  for  lumber  is  definitely  limited  by  the  cost 
of  its  transportation  and  less  than  50  per  cent  of  the  cubic 

3  Frequently  these  factories  are  concentrated  in  a  few  sections  of  the 
country.  Common  illustrations  are  the  woolen  and  cotton  mills  of  New 
England,  the  shoe  factories  in  Massachusetts,  the  automobile  plants  in 
the  Detroit  section,  etc.  See  the  United  States  Census  of  Manufactures 
(1906),  Vol.  I,  Chap.  XII;  and  Malcolm  Keir,  Manufacturing  Industries 
in  America  (1920). 


92  PRINCIPLES  OF  MARKETING 

volume  of  the  tree  reaches  the  market  in  the  finished  form.4 
Ores  are  frequently  partially  refined  near  the  mines.  This  is 
particularly  true  when  a  long  expensive  rail  haul  is  involved. 
The  reduction  of  iron  ore  to  metal,  for  example,  is  frequently 
undertaken  where  the  ore,  or  other  raw  materials — fuel  and 
flux — are  found.  The  pig  iron  is  easily  shipped  in  bulk  and 
is  of  sufficient  value  to  warrant  a  long  haul,  whereas  it  may 
prove  too  expensive  to  haul  the  ore,  the  fuel,  or  flux,  for 
similar  distances.  In  this  way  the  cost  of  transportation  is 
reduced.  Sugar  beets  are  completely  processed  where  they  are 
grown.  Only  one-eighth  of  their  weight  can  be  extracted  as 
sugar.  This  makes  it  necessary  to  place  the  refineries  in  the 
beet-growing  sections;  otherwise  the  expense  of  transporting 
the  raw  materials  to  the  factory  would  make  the  costs  much 
higher  and  prevent  competition  with  lower  cost  refineries.5 

Where  raw  materials  and  finished  products  are  both  very 
bulky,  as  is  the  case  in  the  cement,  brick,  and  tile  industries,6 
there  is  a  tendency  for  the  industry  to  be  operated  in  a  purely 
local  way.  When  there  is  a  suitable  supply  of  such  raw  ma- 
terials at  hand  a  local  plant,  even  though  operating  on  a  rela- 
tively small  scale,  can  far  underbid  more  distant  producers. 
Consequently,  although  a  very  high  proportion  of  such  ma- 
terials is  processed  near  the  final  market,  it  is  also  made  from 
local  materials.7  When  the  raw  material  is  perishable,  there  is, 
likewise,  a  tendency  to  manufacture  near  the  source  of  sup- 
ply. Examples  are  found  in  the  localization  of  the  salmon 
canneries  in  the  Northwest,  and  of  the  vegetable  and  fruit 
canning  industries  in  districts  where  there  is  a  sufficient  supply 
of  materials  to  warrant  the  establishment  of  canneries.  The 

4R.  C.  Bryant,  Prices  of  Lumber,  U.  S.  War  Industries  Board,  Price 
Bui.  No.  43. 

5  Report  of  the  Federal  Trade  Commission  on  the  Beet  Sugar  Industry 
in  the  United  States  (May  24,  1917),  pp.  152-153. 

6  Heinrich  Ries  and  Henry  Leighton,  History  of  the  Clay-Working  In- 
dustry in  the  United  States  (1909),  p.  6. 

7  For  a  good  recent  discussion  of  the  reasons  for  the  localization  of 
industry  the  reader  is  referred  to  Keir,  op.  cit.,  Chap.  III. 


MARKETING  RAW  MATERIALS  93 


packing  of  oysters  in  Baltimore,  and  the  wine  industry  in 
California  are  other  examples.8 

Need  for  Standardized  Materials.  —  In  addition  to  his  need 
for  a  large  supply,  the  manufacturer  desires  raw  materials 
of  the  exact  quality  his  finished  product  demands.  Further- 
more, they  must  be  made  available  for  use  as  needed.  But 
individual  producers  and  even  whole  producing  areas  cannot 
always  meet  these  demands.  Raw  materials  are  by  no  means 
uniform  in  quality,  and  both  the  quantity  and  quality  of  ma- 
terials produced,  as  well  as  the  materials  used,  vary  from  sea- 
son to  season,  from  producer  to  producer,  and  from  manufac- 
turer to  manufacturer.  Raw  materials  must  be  taken  as 
nature  supplies  them,  and  man  is  unable  to  exercise  a  suf- 
ficient influence  to  avoid  variations  in  either  quality  or  quan- 
tity.9 Agriculture  and  many  extractive  industries,  further- 
more, are  seasonal  in  nature,  whereas  the  manufacturing 
plants  which  utilize  their  products  prefer  to  operate  continu- 
ously. Even  when  the  demand  for  the  manufactured  product 
is  seasonal,  production  conditions  usually  make  it  imperative 
that  the  factory  operate  at  a  uniform  rate  of  production 
throughout  the  year  if  that  is  possible. 

The  demand  of  manufacture  for  materials  uniformly  of 
particular  qualities  arises  in  the  first  place  from  conditions 

8  The  bulk  of  the  raw  products  and  the  waste  involved  are,  however, 
likewise  important  factors  in  each  of  these  cases. 

'An  extreme  illustration  of  the  failure  of  producers  to  supply  raw 
materials  of  uniform  quality  is  found  in  the  case  of  American  wool: 
"The  lack  of  uniformity  in  American  breeding  methods  perhaps  does 
more  than  any  other  one  thing  to  make  close  or  accurate  grading  of  our 
wool  impossible.  Neither  wools  from  any  given  locality,  nor  even  sepa- 
rate clips  have  a  closely  uniform  character.  .  .  .  When  the  Wool  Exchange 
attempted  to  list  and  prescribe  a  minimum  number  of  standard  classes, 
it  was  unable  to  reduce  the  list  to  as  few  as  200  main  classes,  and  the 
relations  between  these  were  very  hazy.  This  is  in  sharp  contrast  with 
the  relatively  simple  grading  systems  for  cotton  and  wheat,  and  also 
shows  a  marked  difference  from  conditions  in  either  the  English  or 
Australian  wool-auction  warehouses."  —  Paul  T.  Cherington,  The  Wool 
Industry  (1916),  p.  67. 


94  r     PRINCIPLES  OF  MARKETING 

in  the  market  for  the  finished  products — the  need  to  supply 
a  commodity  of  uniform  quality  to  the  trade.  The  tendency 
for  manufacturers  to  sell  by  specification,  by  brand,  trade 
name,  or  trade-mark  makes  this  particularly  important.10  An 
additional  cause  for  this  demand  for  carefully  standardized 
materials  is  the  fine  adjustment  with  which  some  machinery 
is  now  set — a  condition  which  makes  it  imperative  that  the 
proper  materials  be  used. 

"With  the  increase  in  the  spinning  of  fine  counts  and  in  the 
manufacture  of  fine  goods,  it  has  become  necessary  for  the  manu- 
facturer to  discriminate  in  the  quality  of  cotton  which  he  buys, 
and  in  the  manufacture  of  coarser  yarn  and  cloth  the  machinery 
adjusted  for  a  certain  grade  of  cotton  cannot  be  operated  advan- 
tageously on  a  lower  grade,  while  a  higher  grade  adds  a  needless 
expense.  The  spinner  must  also  be  careful  in  his  selection  of  the 
raw  cotton  because  of  the  preference  of  the  operatives  to  work 
continuously  upon  the  same  grade.  If  an  attempt  is  made  repeat- 
edly to  substitute  an  inferior  grade,  it  is  difficult  to  retain  the 
better  class  of  operatives."1 

Merchandising  Demand  for  Standardized  Materials. — But 
another,  and  perhaps  in  most  cases  a  more  important  reason 
for  the  demand  for  standardized  materials,  is  what  might  be 
called  a  merchandising  demand.  Manufacturers  prefer  to 
be  able  to  purchase  just  the  grade  of  materials  they  need 
to  use.  This  is  because  they  do  not  wish  to  go  to  the  trouble 
and  expense  of  grading  materials  as  they  come  from  the  pro- 
ducer, and  of  marketing  the  surplus  which  they  cannot  use. 
Neither  do  they  care  to  bear  the  extra  cost  of  buying  ma- 
terials which  they  can  not  use,  even  though  they  may  be  able 
to  resell  them.  Nor  do  they  wish  to  bear  any  greater  risk  of 
price  changes  or  of  physical  deterioration  than  is  involved  in 
purchasing  the  minimum  amount  of  the  exact  quality  of  ma- 
terials demanded  by  the  factory.12 

10  See  pp.  402-406. 

11  M.  T.  Copeland,  The  Cotton  Manufacturing  Industry  of  the  United 
States  (1912),  p.  184. 

12  Standardization  by  market  agencies  does  not  always  complete  the 


MARKETING  RAW  MATERIALS  95 

Inspection. — So  important  is  it  to  have  raw  materials  pos- 
sessing proper  characteristics  that  in  many  cases  manufac- 
turers are  not  content  with  buying  raw  materials  on  grade 
alone.  Often,  as  with  wheat,  the  actual  value  of  the  product 
for  manufacturing  can  not  be  determined  with  sufficient  ac- 
curacy by  the  ordinary  methods  of  grading;  therefore  a  care- 
ful inspection  and  laboratory  analysis  of  the  product  is  made 
in  the  interests  of  the  buyer. 

"The  distinctive  value  of  hard  winter  wheat  .  .  .  lies  in  the 
relatively  high  per  cent  of  gluten  it  contains.  .  .  .  The  higher 
the  percentage  of  gluten  in  the  wheat  the  more  desirable  the  flour 
is  for  bread-making  purposes.  .  .  ." 

So  important  is  the  content  to  the  millers  in  determining  the 
value  of  the  wheat  for  milling  purposes  that  "in  several  of  the 
large  grain  handling  cities  there  are  laboratories  devoted  to  a 
scientific  analysis  of  wheat  where  samples  can  be  submitted  and 
the  constituent  elements  of  the  grain  carefully  determined.  .  .  . 

"Ordinarily  the  lower  the  test  weight  of  wheat  .  .  .  the  greater 
is  the  proportion  of  feed  and  the  less  the  proportion  of  flour; 
consequently,  more  pounds  of  No.  3  than  of  No.  2  wheat  are 
required  to  make  a  barrel  of  flour.  This  explains  why  No.  3  wheat 
is  lower  in  price  than  No.  2  wheat,  though  both  are  bought  at  60 
pounds  to  the  bushel."  1S  c 

A  further  reason  for  such  inspection  is  the  opportunity  for 
fraud,  particularly  when  goods  are  purchased  by  grade  or 
sample  through  private  agencies.  The  purchase  of  rubber 
illustrates  this  last  point.  Rubber  is  purchased  from  sam- 
ple, and  as  with  any  article  purchased  in  this  way,  the  chance 

process.  Wool  fleeces,  for  example,  are  graded  by  the  merchant,  but 
the  fleeces  are  also  "sorted"  at  the  factory  because  each  fleece  is  com- 
posed of  a  variety  of  staples  of  different  qualities.  Cf.  Report  of  the 
Live  Stock  Commissioner,  Department  of  Agriculture,  Dominion  of 
Canada  (1911),  The  Sheep  Industry  in  Canada,  Great  Britain,  and  the 
United  States,  pp.  118-123. 

13  United  States  Department  of  Labor,  Bureau  of  Labor  Statistics,  Bui. 
No.  130,  Wheat  and  Flour  Prices  jrom  Farmer  to  Consumer  (Aug.  15, 
1913),  pp.  16,  31,  34. 


96  PRINCIPLES  OF  MARKETING 

for  fraud  is  very  great.  Experts,  therefore,  must  inspect  the 
bulk  of  the  rubber  that  comes  into  a  plant  to  make  sure  that  it 
is  up  to  sample.14 

The  Benefits  of  Grading. — The  considerations  previously 
mentioned  give  well  graded  products  a  certain  value  over  those 
which  are  not  graded.  In  fact  it  has  been  shown  that  a  greater 
premium  is  frequently  paid  for  graded  products  than  the  ad- 
vantages of  standardization  would  seem  to  warrant.  This  is 
an  incentive  to  those  who  produce  or  market  such  products  to 
grade  them  carefully  in  order  to  take  advantage  of  this  en- 
hanced price.  A  still  further  reason  for  grading  is  that  it 
facilitates  contracts  for  future  delivery,  placing  them  upon  a 
known  and  definable  basis. 

Concentration  of  Raw  Materials. — From  the  conditions 
that  have  now  been  discussed — the  need  of  the  manufacturer 
to  procure  a  supply  of  products  of  uniform  qualities,  as  needed, 
from  producers  operating  on  a  small  scale  and  unable  to  meet 
those  demands  individually,  or  even  from  local  supplies — it 
follows  that  the  collection  and  concentration  of  raw  materials 
plays  an  important  part  in  their  marketing.  This  concentra- 
tion serves  a  different  purpose  from  the  concentration  of  farm 
products  for  personal  consumption.  With  the  latter,  concen- 
tration precedes  dispersion  to  small  consumers  and  occurs  be- 
cause it  facilitates  such  dispersion.15  With  raw  materials 
concentration  is  necessary  because  they  are  used  in  large 
quantities  by  factories,  which,  furthermore,  are  often  localized. 
Concentration  also  facilitates  grading.  This  is  due  to  the 
fact  that  grading  is  best  performed  on  a  large  scale;  conse- 
quently, products  produced  on  a  small  scale  must  be  brought 
together  in  large  quantities  before  they  can  be  satisfactorily 
graded.  As  a  result  of  these  conditions  collection  at  local 
producers'  shipping  points,  and  sale  to,  or  through,  concen- 

14  The  B.  F.  Goodrich  Rubber  Co.,  A  Wonder  Book  of  Rubber  (1917), 
p.  27. 
"See  pp.  39-40. 


MARKETING  RAW  MATERIALS  97 

trating  middlemen  at  central  markets,  are  important  steps  in 
marketing  most  raw  materials. 

The  Importance  of  Middlemen. — As  a  rule  the  manufac- 
turer does  not  find  it  to  his  advantage  to  buy  from  producers, 
or  even  from  producers'  local  markets.16  As  has  been  shown, 
this  is  on  account  of  the  fact  that  direct  purchase  would  in-  i 
volve  the  expensive  process  of  buying  by  inspection  or  in  bulk  I 
rather  than  by  grade.  Or  it  may  necessitate  the  purchase  of 
many  more  products  than  he  could  use.  In  this  case  the 
manufacturer  would  be  forced  to  market  the  surplus  for  which 
he  had  no  use.  If  he  did  not  care  to  purchase  products  un- 
suited  to  his  needs  the  manufacturer  would  have  to  keep  in 
touch  with  many  producers  in  order  to  procure  a  sufficient 
and  suitable  supply.  To  operate  in  any  of  the  ways  suggested 
would  be  laborious,  expensive,  and  unsatisfactory  to  the 
manufacturer,  as  well  as  to  the  grower  or  local  dealer  of  whom 
he  purchased.  Thus  we  find,  for  example,  with  country  hides: 

"Each  tannery,  however,  as  a  rule,  specializes  in  certain  kinds  of 
leather,  and  consequently  must  have  uniformity  in  its  supply  of 
hides  and  skins.  Since  the  tanner  is  not  in  a  position  to  handle 
all  kinds  and  classes  of  these  materials,  some  central  collecting  and 
classifying  agency  is  necessary."  * 

The  Broker  and  the  Merchant. — The  broker  and  the  mer- 
chant render  important,  assistance  to  the  manufacturer.     It 
is  their  office  to  know  \ke  market.     They  must  know  not  A, 
merely  prices  and  general  conditions  of  demand  and  supply,  I) 
but  what  qualities  of  product  particular  manufacturers  de- 
sire.    They  must  know,  too,  where  these  can  be  secured,  and 
in  the  case  of  the  merchants,  they  must  themselves  procure 
them,  sometimes  before  they  are  demanded  or  needed  by  the 

16  This  point  is  discussed  on  pp.  39-42. 

"United  States  Department  of  Agriculture,  Farmers'  Bulletin  No. 
1055,  Country  Hides  and  Skins,  Skinning,  Curing  and  Marketing  (1919), 
p.  46. 


98  PRINCIPLES  OF  MARKETING 

manufacturer.18  The  middleman  frequently  buys  by  inspec- 
tion, grades  the  product,  and  then  sells  to  the  manufacturer 
the  exact  qualities  he  desires.  This  sale  to  the  manufacturer 
is  frequently  made  by  description,  although  final  payment 
may  be  made  only  after  the  product  has  been  inspected.  In 
other  cases  the  sale  to  the  manufacturer  is  made  only  after 
he  has  inspected  a  sample  of  the  commodity. 

Even  the  larger  packers  purchasing,  as  they  do,  thousands  of 
head  of  live  stock  daily  do  not  purchase  directly  from  the 
grower,  or  even  from  the  country  shipper  to  any  great  extent, 
but  depend  mainly  upon  the  commission  men  who  operate  in 
the  stockyards  in  the  central  markets.  Large  rubber  fac- 
tories, likewise,  use  brokers.  And  although  they  have  their 
own  buying  organizations  through  which  they  purchase  at 
the  plantation  large  quantities  of  the  rubber  which  they  use, 
they  obtain  the  greater  part  of  their  supply  from  middlemen 
at  the  great  local  points  of  concentration,  such  as  Singapore 
and  Para,  and  of  importers  or  brokers  at  the  European  auc- 
tions or  in  the  New  York  rubber  market.19  Enormous  quan- 
tities of  raw  cotton  for  the  use  of  the  mills  which  produce 
fabric  for  use  in  making  automobile  tires  and  other  products, 
are  bought  by  the  tire  manufacturers  themselves.  But  it  is 
purchased  almost  entirely  of  the  middlemen  in  the  raw  cotton 
markets.  And  some  of  the  industries  using  the  products  of 

18  "The  functions  of  the  eastern  wool  merchant,  so  far  as  the  domestic 
wools  are  concerned,  resolve  themselves  into  two  main  tasks.  The  first 
is  the  purchase  of  large  blocks  of  high-grade  'territory'  wools,  and  the 
purchase  or  marketing  on  commission  of  numerous  small  lots  of  medium 
or  low-grade  'fleece'  wools.  The  second  task  is  the  assembling  of  these 
wools,  grading  them,  and  storing  them  in  lofts  at  the  chief  buying 
centers  for  eastern  mills,  ready  for  purchase  in  graded  lots  for  delivering 
in  quantities  and  at  prices  to  suit  their  manufacturing  customers." — 
Paul  T.  Cherington,  The  Wool  Industry  (1916),  p.  64. 

""Only  the  largest  manufacturers  do  any  direct  buying.  The  market 
is  so  changeable  and  its  operation  requires  so  much  capital  that  manu- 
facturers have  found  it  cheaper  to  buy  through  dealers  [merchants]  and 
brokers."— The  B.  F.  Goodrich  Rubber  Co.,  A  Wonder  Book  of  Rubber 
(1917),  p.  26. 


MARKETING  RAW  MATERIALS  99 

the  extractive  industries  buy  through  brokers,  and  selling 
agents.  This  is  true  with  regard  to  much  of  the  copper,  lead, 
zinc,  clay  for  pottery,  and  lumber  which  is  purchased  by 
manufacturers.  Some  iron  ore  is  likewise  purchased  through 
brokers. 

The  Need  for  a  Continuous  and  Assured  Supply  of  Raw 
Materials. — But  the  manufacturer  not  only  wants  particular 
qualities  or  grades;  he  must  be  assured  of  a  ready  supply. 
Modern  manufacturing  involves  such  large  fixed  investments 
and  the  morale  of  the  employees  depends  so  much  on  regular 
and  permanent  employment  that  business  men  endeavor  to 
operate  their  plants  continuously.  This  is  true  even  when 
the  consumption  or  sale  of  their  product  is  highly  seasonal. 
And  of  even  greater  importance  is  the  need  for  manufacturers 
to  meet  their  own  contracts  for  delivery  and  to  be  prepared 
to  deliver  products  as  their  own  market  demands. 

Methods  of  Assuring  a  Supply  of  Raw  Materials. — There 
are  four  important  means  by  which  manufacturers  may  be 
assured  of  their  supply  of  raw  materials  at  a  reasonable  price: 

(1)  They  may  make  a  series  of  purchases  to  meet  more  or 

less  immediate  and  specific  needs,  depending  on 
knowledge  of  the  market  and  the  good  will  of  supply 
houses  toward  them  to  make  the  supply  continuous. 

(2)  They  may  contract  for  deliveries  of  materials  in  suffi- 

cient quantities  to  meet  their  needs  for  a  considerable 
period  of  time. 

(3)  They  may  buy  a  supply  sufficient  to  cover  a  large  part 

or  even  the  entire  amount  of  the  season's  require- 
ments. 

(4)  They  may  control  the  source  of  supply  through  owner- 

ship, lease,  or  contract. 

(i)  Under  Common  Conditions. — Most  manufacturers 
purchase  a  part  or  all  of  their  stocks  as  needed  from  day  to 
day,  week  to  week,  or  month  to  month.  The  amount  purchased 
at  any  one  time  is  governed  by  such  questions  as  quantity 


100  PRINCIPLES  OF  MARKETING 

discounts,  datings,  transportation  conditions,  storage  space, 
and  financing.  Such  manufacturers  depend  for  a  continuous 
supply  upon  purchases  in  the  open  market  as  the  need  ap- 
pears, or  on  contracts  for  delivery  in  the  immediate  future. 
They  rely  for  the  success  of  this  policy  upon  their  knowledge 
of  the  market  on  the  one  hand  and  on  the  good  will  of  the 
supply  houses  on  the  other.  Meat  packers  depend  on  making 
purchases  of  live  stock  from  day  to  day  at  the  stockyards,  and 
manufacturers  of  corn  products  buy  largely  upon  the  cash  corn 
market.  Many  manufacturers  who  buy  important  raw  ma- 
terials by  other  methods  secure  supplies  for  their  power  plant, 
factory,  and  office  in  this  manner. 

The  good  will  of  supply  houses  is  important  to  those  who 
buy  in  this  way.  "Taking  care  of  one's  customers"  plays  an 
important  role  in  any  market,  and  this  is  equally  true  in 
transactions  involving  raw  materials.  A  manufacturer  who 
has  the  good  will  of  those  from  whom  he  buys,  whether  pro- 
ducer, broker,  or  merchant,  and  who  buys  of  the  best  houses 
without  dividing  his  purchases  among  too  many  of  them,  is 
likely  to  find  that  in  times  of  threatened  shortage  his  supplier 
will  live  up  to  his  contracts,  give  him  warnings  of  advances  so 
that  he  may  stock  up,  or  in  case  of  actual  shortage  see  to  it 
that  he  is  kept  stocked  with  necessary  materials.29  It  is  in 
such  times  that  the  good  purchasing  agent  is  cared  for.  If 
he  has  antagonized  his  suppliers  by  dishonest  or  despicable 
methods,  if  he  has  gained  their  ill  will  through  unfair  treat- 
ment, he  is  sure  to  suffer  in  times  of  shortage.  On  the  other 
hand,  if  he  has  gained  their  good  will,  he  may  not  only  receive 
his  goods  in  sufficient  quantities  but  they  may  even  refuse  to 
exact  the  "pound  of  flesh"  which  the  market  would  warrant. 

The  great  majority  of  raw  materials  are  purchased  in  this 
manner,  i.  e.,  on  the  spot  market,  or  through  contracts  for  de- 
livery in  the  near  future.  To  a  very  large  degree  purchases 
of  each  class  are  made  through  middlemen.  The  manufacturer 

20  A.  E.  Swanson,  op.  cit.,  pp.  616-617. 


MARKETING  RAW  MATMlAl^  10! 

depends  upon  the  middlemen  to  seek  out  sources,  to  purchase 
supplies  in  advance  of  actual  demand,  to  grade  them,  and  to 
have  them  ready  for  use  as  needed.  The  great  staple  agri- 
cultural products  in  particular  are  bought  chiefly  of  middle- 
men, either  directly  of  central  market  merchants,  or  through 
functional  dealers  from  these  merchants  or  from  local  ship- 
pers. The  manufacturing  purchasers  of  wheat,  corn,  and  other 
cereals,  cotton  and  wool,  and  live  stock,  are  all  chiefly  de- 
pendent upon  the  foresight  of  dealers  for  their  supplies  of  raw 
materials. 

An  adequate  supply  of  raw  materials  often  assumes  such 
importance  that  the  manufacturer  is  unwilling  to  place  re- 
liance on  his  knowledge  of  the  market  or  on  the  good  will  of 
supply  houses.  In  such  cases  he  may  contract  for  the  future 
delivery  of  important  materials,  he  may  buy  in  advance  a 
sufficient  supply  to  cover  a  considerable  portion  of  time,  or 
he  may  actually  gain  control  of  a  source  of  supply.  Each 
succeeding  method  gives  more  certainty  than  the  preceding 
that  the  goods  can  be  procured  as  needed. 

(2)  Contracts  for  Future  Delivery. — The  contract  for  the 
future  delivery  of  important  materials  is,  together  with  pur- 
chase in  the  open  market  or  on  short  time  contract,  the  means 
used  by  the  average  manufacturer  in  securing  raw  materials 
and  supplies.  Which  is  used  in  greatest  degree  depends  on  the 
practice  of  the  trade,  the  estimate  of  market  conditions,  and 
the  scarcity  of  the  product.  Flour  mills,  for  example,  can 
buy  wheat  in  the  open  market,  but  they  often  purchase  for 
future  delivery,  so  as  to  protect  themselves  against  advances 
in  the  price  of  wheat  which  may  eliminate  their  profit  on  flour 
which  has  been  sold  on  the  basis  of  lower-priced  grain.21 
Semi-manufactured  production  goods,  such  as  automobile  parts 
and  accessories,  are  also  commonly  contracted  for  in  advance. 

Contracts  for  running  delivery  are  also  common.     Crude 
petroleum  is  sometimes  bought  by  refining  companies  under 
31  See  pp.  368-369. 


102  I'UIftCJjPLES  OF  MARKETING 

contracts  running  for  a  number  of  years,  and  so  almost 
amounts  to  the  control  of  the  source.22  Coal  is  often  bought 
in  this  manner. 

"Contracts  are  generally  made  (1)  for  a  specified  quantity  to 
be  delivered  over  a  stated  period  and  at  an  agreed  rate  per  day, 
week,  or  month;  (2)  for  a  stated  quantity  per  week  or  month  for 
an  indefinite  period;  (3)  for  the  requirements  of  the  consumer; 
or  (4)  for  the  output  of  the  mine.  .  .  .  Contracts  specifying  a 
definite  period  of  time  usually  cover  a  year  .  .  .  sometimes  .  .  . 
5,  10,  or  even '20  years  or  more."  * 

Sugar  factories  make  annual  contracts  with  farmers,  and 
sometimes  contract  with  them  to  grow  beets  on  a  certain 
number  of  acres  each  year,  for  from  three  to  five  years.  The 
contract  binds  the  farmer  to  produce  under  the  supervision 
of  the  sugar  company's  agriculturist  and  binds  the  company 
to  take  the  beets  at  stipulated  base  prices,  the  actual  price 
varying  with  the  quality.24 

(3)  Purchase  of  the  Season's  Supply  in  Advance. — The 
supply  of  raw  materials  often  assumes  such  importance,  how- 
ever, that  the  manufacturer  is  unwilling  to  place  reliance  on 
contracts,  knowledge  of  the  market,  or  the  good  will  of  supply 
houses.  And  for  such,  to  buy  a  sufficient  supply  far  in  ad- 
vance of  the  actual  need  for  processing  is  often  the  best  solution 
of  the  problem  of  supply.  It  is  true  that  outright  purchase 
in  advance  of  need  and  contracts  for  future  delivery  commonly 
serve  the  same  end.  But  the  purchase  and  storage  of  goods 

23  Report  oj  the  Federal  Trade  Commission  on  the  Petroleum  Industry 
of  Wyoming  (1921),  pp.  36-37. 

23  C.  E.  Lesher,  Prices  of  Coal  and  Coke,  War  Industries  Board,  Price 
Bui.  No.  35  (1919),  pp.  18-19. 

34  For  a  complete  contract  see  George  K.  Holmes,  Systems  of  Market- 
ing Farm  Products  and  Demand  for  Such  Products  at  Trade  Centers 
(1913),  Report  No.  98,  U.  S.  Department  of  Agriculture,  pp.  151-2. 
This  report  discusses  the  types  of  sale  prevalent  with  most  agricultural 
products,  and  although  now  several  years  old  it  is  still  valuable.  See 
also  Federal  Trade  Commission,  Report  on  the  Beet  Sugar  Industry  in 
the  United  States  (1917),  pp.  153-163. 


MARKETING  RAW  MATERIALS  103 

is  sometimes  made  necessary  because  supply  houses  will  not 
contract  for  future  delivery.  Another  important  reason  is 
that  contracts  for  future  delivery  do  not  always  assure  de- 
livery. The  seller  may  be  unable  to  procure  the  goods  or  he 
may  even  refuse,  directly  or  indirectly,  to  deliver.  In  times 
of  shortage  contracts  are  frequently  cancelled,  changed,  and 
ignored. 

Cotton  and  woolen  mills  usually  purchase  their  supplies  of 
raw  cotton  and  raw  wool  considerably  in  advance  of  their 
needs.  The  manufacturers  of  clothing  who  use  the  product 
of  the  cloth  mills  likewise  purchase  in  advance  of  immediate 
needs.  In  times  of  shortage,  or  of  threatened  shortage,  manu- 
facturers often  protect  themselves  in  this  way.  When  they 
have  orders  for  future  delivery  they  may  also  stock  materials 
in  advance,  so  as  to  avoid  buying  at  a  later  date  when  prices 
may  have  advanced,  but  after  their  finished  product  has  been 
sold  on  the  basis  of  a  lower  price.  In  such  cases  the  losses 
that  would  result  from  an  increased  price  for  an  important 
raw  material,  or  even  from  the  complete  failure  to  procure 
it,  might  prove  greater  than  the  added  cost  and  inconvenience 
of  carrying  a  stock  in  excess  of  immediate  needs. 

A  further  reason  for  carrying  larger  stocks  than  current 
processing  demands  arises  out  of  quantity  prices  and  carload 
freight  rates.  Many  products  are  sold  at  lower  prices  when 
purchased  in  quantities,  and  carload  freight  rates  are  usually 
much  lower  than  less-than-carload  rates.  A  final  reason 
for  stocking  in  advance  is  speculative  in  its  nature — the 
feeling  that  a  low  point  in  the  market  has  been  reached,  and 
consequently  that  a  speculative  profit  will  be  netted  from 
stocking  in  advance  of  current  needs.  Although  this  reason 
sometimes  affects  the  buying  policy  it  is  less  important  than 
the  other  causes  which  have  been  mentioned. 

Disadvantages  of  advance  contracting  and  purchase. — 
These  policies  of  contracting  for  future  delivery  and  of  stock- 
ing goods  in  advance  have  grave  disadvantages.  One  may 
not  know  what  quantities  of  raw  material  will  be  needed  be- 


104  PRINCIPLES  OF  MARKETING 

cause  he  cannot  judge  the  market  so  far  in  the  future,  or, 
the  market  may  change  and  the  supply  prove  to  be  too  great. 
Even  when  contracts  for  the  sale  of  the  finished  products 
have  been  made,  if  prices  fall  or  the  market  for  the  finished 
product  declines,  those  who  would  normally  buy  the  manufac- 
turer's merchandise  may  find  themselves  unable  or  unwilling 
to  buy  at  the  contract  price.  Contracts  amounting  to  millions 
of  dollars  are  cancelled  each  year,  and  in  times  of  falling 
prices  this  practice  becomes  a  widespread  evil.  A  manufac- 
turer who  has  purchased  or  contracted  for  his  supplies  will 
face  grave  difficulties  under  these  conditions.  Again,  the 
price  paid  may  prove  to  be  too  high,  or  the  quality  bought  may 
not  be  that  which  the  market  demands.  Often,  too,  it  is  im- 
possible to  buy  a  large  supply  without  bidding  up  the  price 
to  a  point  which  would  prove  a  handicap  in  price  compe- 
tition in  the  sale  of  the  final  product.  Furthermore,  im- 
portant problems  of  storage,  financing,  and  risk  have  also  to 
be  solved  when  this  method  is  used. 

Many  raw  materials  are  difficult  to  store.  Soft  coal  is  liable 
to  spontaneous  combustion,  corn  to  heat,  wheat  to  bin-burn. 
Insurance  is  often  costly,  and  expensive  warehouses  may  be 
required.  If  storage  space  has  to  be  provided  especially  for 
this  purpose,  it  is  likely  to  be  used  at  less  than  capacity 
through  most  of  the  year.  But  of  greater  importance  is  the 
necessity  for  tying  up  funds  in  surplus  supplies.  It  requires 
large  capital  or  the  ability  to  borrow  in  large  amounts.  Many 
manufacturers,  however,  have  neither  funds  nor  credit  in  suf- 
ficient amount,  and  banks  are  loath  to  loan  on  raw  materials 
purchased  far  in  advance  of  manufacture  and  not  readily 
salable  in  case  of  a  declining  market,  unless  some  adequate 
means  of  hedging  is  available.25  The  risk,  likewise,  of  loss 
from  deterioration,  or  a  falling  or  slacking  market,  deters 
manufacturers  themselves  from  this  course.  For  as  we  have 
seen,  even  though  they  may  have  contracted  far  in  advance 

25  Many  means  of  hedging  are,  of  course,  available.  Where  this  is  pos- 
sible such  risks  are  in  part,  at  least,  eliminated.  See  Chap.  XVII. 


MARKETING  RAW  MATERIALS  105 

for  the  sale  of  their  product,  the  contract  may  be  cancelled, 
or  the  purchaser,  because  of  the  declining  market,  may  be 
unable  to  pay.  It  is,  nevertheless,  a  method  commonly  used, 
one  which  is  frequently  adopted  in  normal  times,  and  one 
which  is  widely  used  in  times  of  a  shortage  in  the  supply  of 
materials,  or  in  times  of  abnormal  demand  for  finished 
products.26 

Protection  through  hedging. — The  problems  involved  in 
advance  purchasing  are  sometimes  shifted,  in  part,  by  means 
of  the  future  market  for  the  raw  material.  Copeland  de- 
scribes the  importance  of  hedging  in  relation  to  advance  pur- 
chases in  the  cotton  industry: 

"The  mills  found  it  advantageous  in  the  first  half  of  the  nine- 
teenth century  to  buy  their  cotton  early  in  order  to  make  sure  of 
their  supply  and  also  to  have  a  basis  for  price  quotations.  With 
the  cotton  in  their  own  warehouse  they  could  quote  prices  for 
cloth  with  less  risk  of  loss.  The  development  of  organized  specu- 
lation, with  its  steadying  effect  on  prices  and  opportunity  for 
hedging,  has  made  this  factor  less  potent  at  the  present  time."  m 

That  is,  as  the  future  market  for  raw  cotton  has  developed, 
it  has  become  possible  for  manufacturers  to  substitute,  through 
hedging,  a  contract  to  deliver  materials  for  an  actual  advance 
purchase  or  for  the  purchase  of  current  supplies  as  needed 
from  time  to  time.  The  need  for  advance  purchase  continues, 
nevertheless,  even  in  this  case,  for, 

"the  manufacturers  of  the  highest  grades  ordinarily  buy  at  an 
early  date  a  larger  proportion  of  their  total  supply  than  those 
using  ordinary  staple.  The  former  wish  to  exercise  a  wider 
choice  in  their  selection  and  also  to  make  sure  of  an  adequate 
quantity.  The  demand  for  long  staple  cotton  is  frequently  so 

28  Even  firms  which  stock  only  for  current  needs  usually  have  on  hand 
a  larger  supply  of  materials  than  is  absolutely  necessary,  chiefly  because 
experience  has  shown  that  they  must  not  run  too  close  to  the  line  lest 
deliveries  fail. 

*  M.  T.  Copeland,  The  Cotton  Manufacturing  Industry  of  the  United 
States,  p.  182. 


106  PRINCIPLES  OF  MARKETING 

great  that  the  manufacturer  who  delays  is  unable  to  obtain  the 
quality  which  he  desires,  or  he  can  secure  it  only  at  a  very  high 


price." 


In  explaining  the  presence  of  local  grain  elevators  owned  by 
milling  companies,  the  Federal  Trade  Commission  shows  that 
considerations  which  are  similar  to  those  found  in  the  cotton 
industry  operate  to  some  extent  in  the  flour  trade,  and  have 
caused  some  of  the  large  milling  companies  to  own  and  operate 
lines  of  local  elevators,  in  order  to  insure  a  sufficient  supply 
of  grain  of  the  requisite  quality.29 

(4)  The  Control  of  Sources  of  Supply. — Some  manufac- 
turers who  are  large  and  financially  powerful  go  even  further 
in  the  endeavor  to  secure  a  suitable  supply  of  important  ma- 
terials and  establish  a  close  business  relationship  with,  or 
control  over,  important  sources  of  supply.  This  is  particularly 
true  when  the  supply  is  limited  or  is  so  located  that  it  can 
be  easily  monopolized  either  by  a  competitor  or  the  manu- 
facturer himself.  Monopolization  by  the  competitor  might 
leave  the  manufacturer  with  no  materials,  or  force  him  to  pay 
an  exorbitant  price  for  them.  If  he  gains  control  himself,  he 
is  assured  of  a  supply  and  may,  of  course,  squeeze  less  for- 
tunate competitors.  A  desire  to  monopolize  the  supply  or 
to  gain  the  distributive  or  the  productive  economies  of  in- 
tegration are  often  important  considerations;  they  may  in 
fact  sometimes  be  of  the  most  importance.  But  the  neces- 
sity of  an  assured  supply  of  raw  materials  of  the  proper  grade, 
and  at  a  reasonable  price  is  usually  predominant. 

The  ownership  of  clay  beds  by  brick  and  tile  plants;30 
the  ownership  and  leasing  of  ore  lands  by  large  steel  corpora- 
tions, and  the  integration  between  various  "steps"  in  that  in- 


38  M.  T.  Copeland,  op.  cit.,  p.  180. 

"  Report  of  the  Federal  Trade  Commission  on  the  Grain  Trade,  Vol. 
I,  Country  Grain  Marketing  (Sept.  15,  1920),  pp.  78-9. 

'"Heinrich  Ries  and  Henry  Leighton,  History  of  the  Clay-Working 
Industry  in  the  United  States  (1909),  pp.  56-7. 


MARKETING  RAW  MATERIALS  107 

dustry;  the  ownership  and  operation  of  a  steel  mill  and  of  a 
railroad  by  Mr.  Ford — are  all  examples  in  point.31 

* 
"The  International  Harvester  Co.,   either  directly 'or  through 

subsidiary  companies,  manufactures  or  controls  the  manufacture 
of  practically  all  the  raw  mateials  it  uses  with  the  exception  of 
paints.  It  owns  iron  ore  and  coal  properties  and  operates  iron, 
steel,  and  coke  plants.  One  of  its  subsidiaries,  the  Wisconsin 
Lumber  Co.,  owns  extensive  timber  property  and  produces  pole 
stock  and  other  materials.  The  Harvester  Co.  has  also  special 
facilities  for  obtaining  from  the  Philippine  Islands  and  Yuca- 
tan Manila  and  sisal  fiber  used  in  the  manufacture  of  binder 
twine.  In  addition,  the  company  owns  and  operates  several  small 
industrial  railroads.  Through  the  foregoing  and  other  auxiliary 
operations  the  International  Harvester  Co.  is  able  to  obtain 
most  of  its  raw  materials  at  production  costs.  This  gives  the  com- 
pany a  large  advantage,  as  few  of  the  other  companies  control 
their  raw  materials." a 

It  is  not  merely  an  "advantage"  for  the  Harvester  Com- 
pany to  obtain  new  materials  at  production  costs,  but  it  would 
seem  that  it  is  a  necessity  for  such  an  immense  organization 
to  be  assured  of  a  constant  supply  of  essential  raw  materials. 
The  importance  of  such  assurance  is  clearly  shown  in  the  his- 
tory of  the  organization  of  the  United  States  Steel  Corpora- 
tion. The  competing  groups  integrated  various  steps  in  the 
industry  by  purchase  and  lease  and  through  new  building 
operations.  Their  chief  aims  appeared  to  be  to  assure  a 
market  for  their  finished  product  and  a  source  of  supply 
of  their  raw  materials.  Similar  motives  caused  integration 
among  the  "independents." 

31  If  we  may  consider  material  to  be  carried  as  a  raw  material  to  rail- 
roads it  is  interesting  to  know  that  some  of  the  railroads  in  the  anthra- 
cite coal  region,  such  as  the  Reading,  first  gained  control  of  the  mines 
for  the  purpose  of  assuring  themselves  of  the  coal  traffic.  See  Eliot 
Jones,  The  Anthracite  Coal  Combination  in  the  United  States  (1914), 
pp.  29  ff. 

"Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High 
Prices  of  Farm  Implements  (May  4,  1920),  p.  49. 


108  PRINCIPLES  OF  MARKETING 

"The  great  firm  of  Jones  and  Laughlin,  at  Pittsburgh,  makers 
of  structural  steel  from  materials  of  their  own  mining,  are  as 
independent  as  the  Trust,  into  which  they  could  not  be  induced 
to  go.  The  Lackawanna  Steel  Company  has  a  magnificent,  new, 
and  thoroughly  modern  plant  at  Buffalo  on  the  shore  of  Lake 
Erie,  where  the  ore  steamer  can  discharge  its  cargo  at  the  foot 
of  the  blast  furnace,  from  which  the  heated  metal  starts  on  its 
journey  through  the  plant  and  never  cools  until  it  emerges  a 
steel  .rail — the  specialty  of  the  company,  made  from  ore  of  its 
own  mining,  smelted  with  fuel  of  its  own  digging.  The  Penn- 
sylvania Steel  Company,  with  works  on  tide  water  at  Baltimore, 
has  ore  lands  conveniently  situated  in  Cuba,  and  makes  a  specialty 
of  bridge  work  and  steel  buildings.  The  Bethlehem  Steel  Com- 
pany has  ore  lands  in  Cuba,  and  the  leading  steel  maker  of  the 
South,  the  Tennessee  Coal  and  Iron  Company,  like  many  others, 
digs  its  own  raw  materials.  The  financial  flurry  of  November, 
1907,  enabled  the  United  States  Steel  Corporation  to  buy  the 
latter — a  most  suggestive  episode."  a 

When  direct  control  over  sources  of  supply  is  not  feasible 
other  means  may  be  used.  The  large  refiners  of  oil  are  said 
to  obtain  very  great  advantages  from  their  ownership  of  pipe 
lines.  Pipe  line  transportation  of  petroleum  is  much  cheaper 
than  transportation  by  tank  cars,  and  those  companies  which 
are  large  enough  to  own  pipe  lines  are  enabled  to  get  their  sup- 
plies directly  from  the  wells  at  the  lowest  possible  cost.34 

33  J.  Russel  Smith,  The  Story  of  Iron  and  Steel  (1908),  pp.  146-7. 

34  "It  is  remarkable  that  all  through  the  discussion  of  Standard  power 
and  success  there  is  no  mention  of  a  monopoly  of  production.    The 
so-called  anthracite-coal  trust  owns  or  controls  many  of  the  mines,  and 
the  steel  corporation  controls  the  richest  of  the  iron-ore  deposits.    But 
the  'Oil  Trust/  greater  than  either,  strange  as  it  may  seem,  has  never 
made  any  concerted  effort  to  secure  general  possession  of  the  oil  wells. 
In  fact,  the  Standard  had  been  thoroughly  established  in  its  monopoly 
of  the  refining  business  long  before  it  entered  this  field  of  activity  at 
all 

"The  reasons  for  this  apparently  contradictory  policy  of  struggling  to 
dominate  the  refining  end  of  the  business  and  neglecting  the  sources  of 
the  crude  material  are  clear  enough,  and  show  the  wisdom  of  the 
Standard  management.  If  it  is  so  desired,  the  Standard  could  undoubt- 


MARKETING  RAW  MATERIALS  109 

It  is  claimed  with  much  show  of  reasonableness  that  the  chief 
purpose  of  the  packers'  control  of  the  stockyards  has  not 
been  used  to  force  prices  down,  or  to  keep  out  competitors 
through  collusive  buying,  but  to  supply  needed  facilities  for 
handling  live  stock  on  its  arrival  at  market,  as  a  means  of 
assuring  them  of  a  continuous  supply  of  raw  materials.35 

Summary. — It  appears  then,  in  summary,  that  manufac- 
turers with  their  large  investments  in  plant  and  equipment 
and  with  a  clientele  of  customers  whose  patronage  has  been 
procured,  in  many  cases,  at  great  cost  and  after  a  long  strug- 
gle, must  be  assured  of  an  adequate  supply  of  materials. 
There  are  four  important  means  of  insuring  this  supply.  First, 
current  purchases  may  be  made  in  the  open  market.  Second, 
contracts  may  be  made  for  future  delivery.  Third,  large  sup- 
plies may  be  purchased  in  advance  of  actual  needs.  And, 
finally,  the  sources  of  supply  may  be  owned  or  controlled. 

edly  acquire  the  same  degree  of  control  over  production  as  it 
enjoys  over  refining  and  selling,  but  monopoly  ownership  of  a  natural 
resource  would  be  likely  to  raise  a  terrific  storm  of  the  most  bitter 
public  opposition.  By  following  its  present  course  and  posing  merely 
as  a  buyer  and  seller  of  oil,  with  nothing  to  prevent  the  entrance  of 
competitors  into  the  field,  the  Standard  points  to  its  superior  ability, 
efficiency,  and  economy  as  a  sole  basis  of  its  success.  All  the  time,  how- 
ever, it  enjoys  in  fact  a  very  effective  control  of  production  through  its 
ownership  of  the  only  efficient  means  of  transportation.  The  element 
of  risk  in  production  has  also  been  an  important  factor  in  influencing 
the  Standard  policy.  By  leaving  all  the  risks  of  prospecting,  drilling, 
and  operating  to  individual  producers,  the  Standard  -runs  none  of  the 
many  chances  of  heavy  loss  on  unprofitable  ventures.  When  every- 
thing is  considered,  owning  the  refineries  and  pipe  lines  is  far  more 
profitable  and  every  whit  as  effective  as  owning  the  wells." — W.  S. 
Tower,  The  Story  of  Oil  (1909),  pp.  194-196.  This  was  written  before 
the  "dissolution"  of  the  Standard  Oil  "trust,"  but  it  illustrates  the  point 
just  as  well.  See  also  the  Report,  of  the  Federal  Trade  Commission  on 
the  Price  of  Gasoline  in  1915. 

*5  For  both  sides  of  the  controversy  concerning  packer  control  of  the 
yards  see  the  Report  of  the  Federal  Trade  Commission  on  the  Meat- 
Packing  Industry,  5  vols.,  and  the  replies  of  Swift  and  Company  thereto 
(published  by  Swift  and  Co.). 


110  PRINCIPLES  OF  MARKETING 

In  conclusion  it  should  be  stated  that  a  firm  need  not,  and 
usually  does  not,  confine  itself  to  any  one  method.  It  is  often 
a  wise  policy  to  divide  sources  and  to  utilize  various  methods. 
In  doing  this  the  manufacturer  is  enabled  to  keep  more  than 
one  source  of  supply  open.36  Market  conditions  vary  from 
time  to  time  and  methods  must  be  changed  to  correspond. 

38  This  becomes  particularly  important  with  manufacturers  who  import 
from  foreign  countries  such  products  as  the  better  qualities  of  wool  and 
cotton,  rubber,  and  certain  chemicals  and  minerals.  War,  a  breakdown 
in  transportation,  or  an  unfavorable  exchange,  may  make  a  particular 
source  unavailable  or  unattractive. 


CHAPTER  VII 
MARKETING  MANUFACTURED  PRODUCTS 


Preceding  chapters  have  dealt  in  some  detail  with  the  con- 
ditions which  are  peculiar  to  the  marketing  of  raw  materials 
and  farm  products.  It  is  the  purpose  of  the  present  chapter 
to  point  out  those  considerations  most  important  to  an  under- 
standing of  the  marketing  of  manufactured  products. 

Control  of  the  Product. — One  rharaptpristic  in—particular 
distinguishes  manufactured  products  from  farm  products:  that 

is,  t.hp^ ability  nf  f]ip  pror^^r  tft  control  tlm  qualify  nf  big 
jsrodyct — to  standardize  products  and  methods  of  production 
so  that  it  can  be  told  in  advance,  within  narrow  limits,  just 
what  each  successive  product  will  be  like.  It  will  be  remem- 
bered that  some  of  the  problems  involved  in  marketing  raw 
materials  grow  out  of  the  lack  of  such  standardization,  and 
that  one  cause  for  the  demand  for  standardized  materials 
is  the  desire  of  the  manufacturer  to  make  a  standardized 
product.  The'  expensive  processes  of  grading  and  of  inspection 
are  reduced  to  a  minimum  with  most  manufactured  products, 
and  consequently,  sale  by  sample  and  by  description  is  made 
easier. 

Faith*.  iri»  th'e-  Producer. — An  additional  condition  of  impor- 
tance to  making  easy  the  sale  of  manufactured  products  by 
sample  and  description  is  the  existence  of  a  large  degree  of 
faith  in  the  integrity  of  the  manufacturer.  The  average  manu- 
facturer, operating  on  a  large  scale,  and  often  branding  his 
product,  has  so  large  a  stake  in  his  good  will  that  it  is  very 
definitely  to  his  interest  to  have  the  run  of  products  like  the 

111 


112  PRINCIPLES  OF  MARKETING 

sample  or  description,  and  like  the  products  bearing  his  brand, 
which  consumers  have  purchased  in  the  past  and  which,  be- 
cause of  their  satisfaction,  they  are,  from  time  to  time,  buy- 
ing again.  This  desire  to  create  and  keep  good  will  causes 
the  manufacturer  to  wish  to  produce  standardized  goods,  and 
the  conditions  of  production  in  manufacture  make  it  possible. 

Control  of  Volume. — This  control  of  the  conditions  of  pro- 
duction, in  addition  to  enabling  the  manufacturer  to  control 
the  quality  of  his  product,  permits  him  to  control  its  quantity. 
He  can  determine  far  in  advance  of  actual  production  just 
what  quantity  he  intends  to  produce.  He  can  thus  in  large 
degree  plan  his  production,  marketing,  and  financing  in  ad- 
vance, and  he  can  modify  the  quality  and  change  the  volume 
of  production  as  the  needs  of  the  market  dictate. 

Large  Scale  Production. — Large  scale  production  is  an- 
other characteristic  of  manufactured  products  which  has  im- 
portant effects  on  the  methods  of  their  marketing.  Some  of 
these  effects  of  large  scale  production  were  described  in  Chap- 
ter II,  where  the  importance  of  demand  creation  to  the  manu- 
facturer was  discussed.  They  are  briefly:  (1)  the  necessity 
of  having  a  large  market  for  the  individual  manufacturer's 
product;  (2)  the  desire  for  enlarging  the  market  in  order  to 
take  advantage  of  any  economies  of  production  or  of  distri- 
bution which  would  result  from  an  even  larger  production; 
(3)  the  importance  of  operating  the  plant  continuously  in 
order  to  meet  fixed  expenses,  and  to  keep  the  organization 
together  and  functioning;  and,  finally,  (4)  the  fact  that  the 
development  of  large  scale  production  has  brought  about  in 
many  industries  a  condition  of  almost  constant  potential  overy 
production.  , 

Tendency  toward  Overproduction. — Whereas  agriculture 
is  predominantly  a  small  scale  industry  which  produces  pri- 
marily staple  products,  manufacture  is  predominancy  a  large 
scale  industry  producing  both  staples  and  specialties,  and 
with  a  constant  tendency  toward  overproduction  in  individual 
lines.  With  nearly  all  products,  whether  the  scale  of  produc- 


MARKETING  MANUFACTURED  PRODUCTS    113 

tion  be  large  or  small,  the  normal  situation  in  the  manufac- \ 
turers'  market  is  a  condition  of  keen  competition  with  actual  I 
or  potential  plant  capacity   in  excess   of  existing  demand.1 1 
This  situation  leads  to  two  kinds  of  endeavor  on  the  part  of  the 
manufacturer:  one  to  reduce  costs  of  production  and  marketing 
or  to  improve  the  product  or  service;  the  other  to  achieve 
greater  control  over  the  market,  by  means  of  demand  crea-  » 
tion,  the  control  of  the  supply  (monopoly),  or  through  com- 
binations with  competitors.     Emphasis  on  cost  and  quality 
and  attempts  at  combination  or  monopoly  are  of  great  im- 
portance to  manufacturers  of  goods  bought  on  buyers'  speci- 
fications, particularly  materials  for  further  manufacture,  such 
as  cotton  in  the  grey,  pig  iron,  coke,  and  lumber.     Such  em- 
phasis is  also  important  with  many  kinds  of  equipment  and 
supplies,  including  the  general  run  of  tools  and  machinery. 
Demand  creation  plays  the  larger  part  with  new  products  of  * 
all  kinds,  with  new  brands  of  old  products  sold  to  consum- 
ers, and,  in  fact,  with  most  products  sold  to  ultimate  con- 
sumers. 

Need  for  Demand  Creation. — There  are  among  manufac- 
tured products  a  great  number  of  specialties — new  products 
to  gratify  old  needs,  and  new  products  to  meet  hitherto  un- 
realized needs  and  created  needs.  Consequently,  the  need  for 
demand  creation  is  felt  keenly  in  a  large  part  of  the  manu- 
facturing field.  With  new  products  it  is  necessary  to  ac- 
quaint prospective  customers  with  the  product  and  to  create 
a  demand.  As  the  product  is  unknown,  exchange  can  take 
place  only  after  the  seller  has  done  this,  and  the  impetus 

*It  should  not  be  inferred  from  this  that  agriculture  is  free  from 
overproduction.  We  mean  by  "overproduction"  that  so  many  goods  of  a 
given  kind  have  been  produced  that  they  cannot  be  sold  at  a  price 
which  will  cover  the  cost  of  production  and  leave  a  normal  rate  of 
profit  to  the  producer.  This  condition  is  frequently  faced  by  large 
numbers  of  growers  of  farm  products.  Nevertheless,  farmers  are  pro- 
ducing, as  a  rule,  staple  commodities  having  a  relatively  inelastic 
demand.  Furthermore,  their  plant  (farm)  can  be  more  readily  adapted 
to  meet  changing  conditions  of  demand. 


114  PRINCIPLES  OF  MARKETING 

to  exchange  must  come  from  him.  Furthermore,  whether  the 
products  be  new  or  old,  goods  sold  to  ultimate  consumers 
are  sold  to  those  who  are  not  skilled  in  buying  and  who  will 
not,  except  with  the  larger  and  more  important  purchases, 
spend  much  time  in  their  buying.  With  such  customers,  skill- 
ful selling  effort  can  achieve  far  more  than  is  possible  when 
the  goods  are  bought  in  large  quantities  by  skilled  buyers 
capable  of  determining  characteristics  and  qualities  for  them- 
selves. 

Changing  Conditions. — The  desire  of  the  manufacturer  to 
control  his  ultimate  market  and  to  keep  in  touch  with  all  the 
conditions  which  may  affect  the  demand  for  his  product  has 
produced  a  rather  general  tendency  to  eliminate  middlemen, 
or  at  least  to  take-over  a  part,  or  all,  of  their  selling  function, 
and  to  control  their  other  operations  in  the  interest  of  indi- 
vidual manufacturers.  Developments  in  transportation  and 
communication  have  made  this  both  more  necessary  and  more 
possible  of  accomplishment.  In  this  connection  one  of  the 
greatest  disorganizing  factors  in  the  market  has  been  adver- 
tising: the  introduction  of  which  has  taken  place  rapidly  on 
a  national  scale,  as  Americans  have  become  a  national  maga- 
zine and  newspaper  reading  public.  More  than  any  other  one 
agency  advertising  has  enabled  the  manufacturer  to  appeal 
directly  to  consumers  over  the  heads  of  middlemen,  and  in 
consequence  has  helped  to  render  obsolete  the  established 
methods  of  distribution. 

But  the  need  for  demand^  creation  has  not  been  alone  in 
causing  changes  in  the  marketof  the  manufacturer.  The 
varying  size  of  producing_units  has  also  had  an  effect.  There 
remain  many  small  domestic  producers,  and  contrasted  with 
them,  and  often  competing  with  them,  there  have  grown  up 
giant  plants,  often  combined  with  other  great  plants,  and  there 
are  all  sizes  of  plants  and  degrees  of  combination  between 
these  extremes.  Now  although  it  may  be  obviously  impossible 
for  small  producers  to  market  their  product  directly,  it  is 
frequently  possible  for  the  great  plant  with  a  large  volume 


MARKETING  MANUFACTURED  PRODUCTS    115 

of  business  and  enormous  financial  resources  to  do  so,  or  if 
that  is  not  feasible  it  is  at  least  possible  for  it  to  exercise 
a  large  degree  of  control  over  its  distributors.  And,  on  the 
other  hand,  whereas  some  small  factories  may  be  able  to 
market  their  entire  output  in  the  immediate  vicinity,  large 
plants  have  to  seek  a  wider  market.  Under  such  conditions 
many  .diverse  methods  of  'distribution  have  arisen  and  are 
found  operating  side  by  side. 

Integration  between  Manufacturers. — The  development  of 
large  scale  production  has  led  not  only  to  clirect  marketing 
by  manufacturers,  but  also  to  integration  between  manufac- 
turers.  In  Chapter  VI  it  was  shown  that  plants  sometimes 
gain  control  of  other  plants  supplying  important  production 
goods.  It  is  likewise  true  that,  as  in  the  steel  industry  and 
the  meat  packing  industry,  manufacturers  of  the  cruder  prod- 
ucts have  gained  control  of  plants  utilizing  their  output  as 
production  materials.  In  this  way  they  are  assured  of  a 
market  and  eventually  they  may  control  all  the  steps  in- 
volved in  the  production  of  the  finished  products.  In  such 
cases  the  product  of  one  step  in  the  industry  becomes  the 
production  material  of  the  next.  No  true  marketing  takes 
place,  since  the  two  steps  are  under  the  same  management. 
The  transfer  of  title  is  largely  an  accounting  affair,  and  not 
until  the  product  has  passed  the  final  stage  and  is  ready  for 
the  general  market,  is  real  sales  effort  or  real  buying  effort 
exerted. 

Wholesale  Markets. — There  is  nothing  in  the  jnarketing  of 
manufactured  products  to  compare  with  the  growers'  local 
market.  In  consequence,  the  need  for  physical  concentration 
of  products  from  such  markets  is  missing.  When  sales  are 
made  the  goods  can  usually  be  shipped  directly  from  the 
factory  without  the  need  for  an  accumulation  from  scattered 
sources  of  great  stocks  at  a  central  market.  In  some  trades, 
however,  there  is  a  function  which  is  performed  by  middle- 
men that,  is  in  some  measure  comparable  to  the  work  of  the 
commission  men  of  the  agricultural  market.  This  happens 


116  PRINCIPLES  OF  MARKETING 

when  many  of  the  manufacturers  are  operating  on  a  rela- 
tively small  scale,  producing  material  for  further  manufacture 
— as  in  the  textile  trades — or  turning  out  but  a  few  of  a  large 
line  of  products — as  in  the  hardware  and  grocery  field.  In 
these  trades  there  are  functional  middlemen  of  exchange  vari- 
ously  called  "commission  men,"  "selling  agents,"  "brokers,"  or 
"manufacturer's  agenfs,"  who  make  it  their  business  to  sell 
the  product  of  a  given  factory  to  manufacturers  or  to  other 
middlemen.  Such  middlemen  are  common  in  the  textile, 
hardware,  and  grocery^  business.2 

"A  most  important  effect  of  the  prevalence  of  small  scattered 
establishments  on  the  method  of  distribution  has  been  the  resort 
to  the  broker  of  canned  goods.  The  small  size  of  the  ordinary 
cannery  has  made  the  establishment  of  an  expensive  selling  force 
impracticable,  and  the  distance  of  the  canners  from  the  jobbers, 
who  are  located  in  large  cities,  has  necessitated  recourse  to  a  bro- 
kerage or  selling  agency  in  the  vicinity  of  the  jobber."3 

Dealers  of  this  kind  frequently  contract  to  sell  the  product 
of  several  factories,  and  are  thus  enabled  to  sell  in  larger  quan- 
tities than  could  any  of  the  individual  manufacturers  they 
represent.  It  is  also  likely  that  very  often  the  economies  of 
marketing  on  a  large  scale  are  achieved  in  this  way.  The 
activity  of  these  dealers  is  evidently  somewhat  similar  to  that 
of  the  concentrating  middlemen  of  the  agricultural  market. 

Although  the  concentrating  efforts  of  the  central  market 
for  farm  products  are  not  duplicated  in  the  manufacturers' 
market,  the  assembly  efforts  of  the  jobbing  market  are 
paralleled.  This  is,  of  course,  particularly  true  of  products 
for  personal  consumption.  But  it  is  also  true,  in  a  consid- 
erable degree,  of  manufactured  products — such  as  machine 
parts — which  are  sold  to  other  manufacturers  as  production 
materials,  as  well  as  of  equipment  and  supplies  sold  to  manu- 

2  Their  efforts  will  be  more  fully  described  in  Chap.  IX. 

3  Report  of  the  Federal  Trade  Commission  on  Canned  Food:  General 
Report  and  Canned  Vegetables  and  Fruits  (1918),  p.  2. 


MARKETING  MANUFACTURED  PRODUCTS    117 

facturers,  public  utilities,  farmers,  and  merchandisers.4  Much 
the  same  considerations  as  were  found  in  the  wholesaling  of 
agricultural  products  prevail  here.  The  economy  of  ship- 
ping as  near  to  the  market  as  possible  in  carload  lots  tends 
naturally  to  develop  dealers  who  specialize  in  purchasing 
large  lots  to  break  up  into  the  smaller  lots  demanded  by  the 
trade.  Such  dealers  center  in  larger  cities  because  of  the 
larger  number  of  consumers  located  therein  and  because  of 
the  greater  facilities  that  exist  for  receiving  and  shipping. 
If  manufacturers  prefer  to  sell  directly  to  retailers  or  other, 
buyers  their  sales  branches  or  central  offices  will  center  at 
such  points  for  these  same  reasons.  And  if  buyers  prefer 
to  buy  "direct"  they  will  send  their  buyers  to  these  markets, 
because  there  they  will  be  in  touch  with  large  quantites  and 
varieties  of  supplies  and  will  benefit  most  from  the  competition 
of  supply  houses.5 

Central  Wholesale  Markets. — Some  cities  are  peculiarly 
well  located  to  become  great  wholesale  markets.  They  are 

4  "It  is  estimated  that  of  the  standard  line  of  machine  tools  possibly 
80  to  85  per  cent  is  sold  through  dealers  and  the  balance  by  manu- 
facturers.   Direct  sales  occur  more  largely  in  the  case  of  new  tools  or 
devices,  the  manufacturer  introducing  the  same,  and  then  getting  the 
dealers  to  stock  the  item.    An  increasing  tendency  toward  the  distribu- 
tion of  both  mill  supplies  and  tools  through  dealers  is  noted." — ''Terms 
of  Sale  in  the  Principal  Industries,"  Federal  Reserve  Bulletin   (Feb., 
1920),  p.  155. 

5  Markets  for  individual  commodities  are  often  located  in  a  particular 
district  of  a  city. 

"The  cause  for  this  striking  segregation  of  the  market  is  twofold:  on 
the  one  hand  it  is  due  to  unusual  transportation  facilities  at  one  part  of 
the  district,  and  upon  the  other  to  the  increasing  rents  at  a  center, 
driving  factories  to  the  rim  and  leaving  the  heart  to  offices  which  take 
up  little  space.  These  central  places  too  offer  advantages  for  buyers 
to  congregate;  aside  from  railway  or  hotel  accommodations,  it  is  easier 
for  buyers  to  visit  a  series  of  warerooms  close  together  than  it  is  to 
travel  from  mill  to  mill,  although  the  mills  may  all  be  in  one  district. 
Wherever  an  industry  has  become  sufficiently  developed  in  one  locality 
to  bring  forth  a  central  market  for  buying  and  selling,  the  advantages 
of  the  localization  are  greatly  increased,  since  a  well-defined  place  of 


118  PRINCIPLES  OF  MARKETING 

situated  at  the  center  of  large  buying  areas  and  have  superior 
transportation  facilities.  Because  of  their  location  at  natural 
trade  centers,  on  inland  waterways  or  on  favorable  harbors 
at  a  convenient  point  between  producing  and  consuming  areas, 
they  are  naturally  fitted  to  become  great  trading  centers. 
With  the  development  of  railroads  these  natural  advantages 
have  been  perpetuated;  for  railroads  have  centered  there  and 
competing  among  themselves  and  with  the  water  transporta- 
tion have  brought  improved  transport  service  and  low  rates. 
Such  factors  were  found  to  be  determining  in  the  location 
of  central  markets  for  farm  products.  In  the  case  of  manu- 
facturers a  further  reason  for  the  creation  of  such  large 
markets  is  the  fact  that  these  cities  have  generally  become 
large  manufacturing  centers.  Since  they  serve  as  distributing 
points  for  certain  essential  raw  materials,  since  they  afford  a 
market  for  finished  products,  and  since  they  afford  supplies 
of  labor  and  capital,  as  well  as  adequ^tejti^iis^oji,  they  be- 
come Jarge3manuTactujjiig_cenle.rs.  These  cities  serve,  con- 
sequently, not  only  as  assembling  points  for  products  from 
distant  factories,  but  also  as  dispersing  poinj/s  for  products 
manufactured  in  the  surrounding  district." 

New  York  is  thought  of  primarily  as  a  commercial__city. 
Its  harbor  and  its  means  of  reaching  an  important  hinterland 
by  rail  and  water  have  developed  it  into  an  important  import 
and  export  market  for  manufacturers  as  well  as  for  raw 
materials  and  foods.  But  New  York  is  the  greatest  manu- 
facturing center  in  the  country.  Chicago  is  not  only  an  im- 
portant  central  market  for  farm  products,  but  also  a  great 
center  for  wholesaling  finished  products  of  all  kinds,  and  a 
leading  manufacturing  center.  St.  Louis,  with  adequate 
transport  facilities  to  the  vast  'agricultural  districts  to  the 
west  and  south,  early  became  the  greatest  distributing  center 
in  the  country  for  hardware  products.  Kansas  City  in  a 

bargain  and  sale  secures  more  trade  than  would  a  number  of  scattered 
offices." — Malcolm  Keir,  Manufacturing  Industries  in  America  (1920), 
p.  78. 


MARKETING  MANUFACTURED  PRODUCTS    119 

similar  location  became  the  foremost  distributing  point  for 
agricultural  implements  and  machinery. 

But  though  our  largest  cities  are  the  great  central  distribut- 
ing points  for  manufacturers,  they  have  gradually_lost  their 
relative  impoxtaace.  With  the  growth  in  the  density  of  popu- 
lation and  with  the  gradual  westward  movement  of  popula- 
tion and  of  manufacture,  markets  have  developed  in  many 
smaller  cities  to  serve  as  local  distributing  points  for  the 
supply  of  surrounding  areas. 

The  Sale  of  Manufactures. — Competition  among  manufac- 
turers is  different  and  the  marketTslibt  so  well  unified  as 
is  the  market  for  farm  products.  With  the  latter ,-oompetiti on 
often  works  itself  out  in  organized  exchanges,  and  to  a  less 
degree,  through  auction  companies.  But  the  manufacturers' 
market  for  few  products  is  so  unified.  There  are  practically 
no  exchanges.  Buying  andTelling  of  products  at  wholesale 
tends  to  center  in  the  wholesale  markets  which  have  been 
described,  but  purchases  and  sales  are  made  as  the  result 
of  private  bargaining  rather  than  through  open  trading  on 
exchanges  or  auctions.  Nprules  are  laid  down  by  a  central 
body,  as  in  the  caseof  the  orjmni/pri  pvrbanp^s,  and  there  are 
no  centralized  offerings  through  a  single  medium  as  with  the 
auction  company.  Rather,  there  exist  in  the  central  markets 
the  offices  of  manufacturers,  wholesalers,  and  brokers,  to  which 
buyers  come,  and  from  which  the  sales  efforts  of  vendors 
radiate. 

Neither  is  the  sale  of  manufajctured^ goods  closely  confined 
to  a  price  basis.  But  here  one  must  generalize  with  care. 
Semi-manufactured  goods  in  particular  are  likely  to  be  sold 
on  a  price  basis,  resting  on  sellers'  grades  or  buyers'  speci- 
fications. But  the  characteristics  of  the  great  bulk  of  con- 
sumers' goods  cannot  be  readily  determined  or  standardized, 
and  individual  consumers  and  classes  of  consumers  react  in 
different  ways  to  the  same  characteristics.  Consequently, 
more  selling  and  shopping  is  found  in  their  sale.  Even  when 
actual  resale  prices  are  fixed,  as  with  certain  products  ad- 


120  PRINCIPLES  OF  MARKETING 

vertlsed  to  consumers,  such  as  Victrolas,  Kodaks,  and  Arrow 
collars,  bargaining  is  really  carried  on  through  the  use  of 
advertising  and  salesmen.  For  an  endeavor  is  made  to  con- 
vince consumers  or  dealers  that  they  will  get  the  most  for 
their  money  if  they  purchase  a  particular  product. 

II 

Classes  of  Manufactured  Goods. — The  problems  involved 
in  marketing  manufactured  products  differ  with  the  purposes 
for  which  they  are  used  and  the  type  of  market  for  which 
they  are  produced.  There  are:  three  important  classes  of 
manufactured  goods  which  closely  correspond  to  those  de- 
scribed in  Chapter  I.  These  are:  (1)  semi-manufactured 
products  which  must  be  further  processed  before  they  are 
ready  for  their  final  market;  (2)  equipment  and  supplies  for 
factories,  mercantile  establishments,  and  such  service  insti- 
tutions as  banks  and  public  utilities;  .(3)  finished  products 
ready  for  final  consumption  by  industries  and  institutions,  or 
for  personal  consumption  by  individuals. 

Semi-manufactured  Products. — Semi-manufactured  prod- 
ucts are  production  materials  for  other  factories,  and  as  such 
their  marketing  bears  a  close  resemblance  to  the  marketing 
of  raw  materials  discussed  in  Chapter  VI.  A  chief  problem 
with  these  goods  is  not  only  to  manufacture  a  product  of  a 
particular  determinable  quality,  which  will  meet  the  require- 
ments and  specifications  of  the  market,  but  also  to  make 
this  product  at  a  cost  which  is  low  enough  to  enable  the 
producer  to  compete  on  a  price  basis  and  still  net^a  profit. 
It  is  further  necessary  to  give  good  service  to  customers.  Here, 
as  with  raw  materials,  the  need  of  the  customer  to  be  assured 
of  a  product  of  uniform  quality  supplied  as  he  requires  it 
assumes  large  importance.  The  ability  of  an  individual 
manufacturer  to  meet  this  need,  and  the  fact  that  he  does, 
are  important  considerations  in  procuring  and  maintaining 
patronage.  Again,  as  with  raw  materials,  so  here,  factories 


,  MARKETING  MANUFACTURED  PRODUCTS    121 

depending  upon  such  manufacturers  for  their  materials  fre- 
quently find  it  to  their  advantage  to  own  and  operate,  to  con- 
trol, or  to  have  close  business  relations  with  such  supplying 
industries  in  order  that  a  continuous  supply  may  be  assured. 
Consequently,  in  such  industries  there  is  frequently  a  large 
degree  of  integration  of  manufacturing  steps. 

The  problems  of  marketing  these  production  goods  are 
relatively  simple.  Little  or  no  demand  can  be  created  other 
than  through  the  rendering  of  good  service  and  the  ability 
to  offer  lower  prices  than  competitors.  The  chief  problems 
are,  consequently,  problems  of  production  and  not  of  selling. 
Nevertheless,  these  very  facts  may  make  it  ^3esiraBle^Tor 
the  producers  of  these  goods  to  control  the  further  process.es 
of  their  industry  in  order  to  insure  themselves  a  permanent 
market.  Integration^  then,  may  result  either  from  the  desire 
of  the  buying  industry  to  be  assured  of  a  suppl^  or  from 
the  desire  of  the  selling  industry  to  be  assured  of  a  market. 
Little  demand  can  be  created  because  the  goods  are  usually 
bought  on  specification,  and  on  delivery  they  are  sampled  in 
order  to  determine  whether  they  conform  thereto.  That  is, 
the  buyer  decides  for  himself  the  characteristics  of  the  product. 
He  does  not  need  to  be  told. 

Another  important  characteristic  of  semi-manufactured 
goods  is  the  fact  that  they  are  usually  bought  on  ajarge 
,scale  by  a  relatively  small  number  of  buyerg.  The  difficulties, 
consequently,  in  finding  the  possible  buyers  and  the  problems 
of  splitting  large  lots  into  suitable  quantities  are  not  great. 
The  marketing  machinery  is  simple. 

Equipment  and  Supplies. — Equipment  and  supplies,  such 
as  machinery,  oils,  paper,  cloth,  and  office  equipment,  which 
are  bought  for  use  in  industry  and  commerce,  have  some  of 
the  characteristics  of  semi-manufactured  products  and  some 
of  those  of  finished  products  for  personal  consumption.  With 
them,  measurable  physical  characteristics  are  important,  and 
to  the  extent  that  these  predominate  demand  creation  is  un- 
important and  cost  and  service  are  the  important  considera- 


r  2  f 

122  PRINCIPLES  OF  MARKETING 

tions.  But  the  mere  physical  characteristics  of  the  materials 
from  which  the  product  is  made  are  often  of  less  importance 
than  the  performance  of  the  article  in  use.  Here  there  is 
frequently  less  opportunity  to  test  out  the  article  with  any 
great  degree  of  accuracy,  except  as  it  is  tested  out  in  opera- 
tion over  a  period  of  time.  Future  performance  is  hard  to 
determine  in  advance  and  opinions  may  well  differ  on  the 
importance  of  particular  effects  and  on  the  manner  in  which 
different  products  produce  them.  These  conditions  leave  room 
for  sales  effort. 

With  heavy  machinery  the  weight  and  strength  of  a  heavy 
and  expensive  frame  must  be  balanced  against  a  lighter,  less 
expensive  frame,  but  one  which  may,  nevertheless,  outlast  the 
r  demand  for  the  machine.  Particularly  in  industries  in  which 
processes  are  changing  rapidly  must  such  characteristics  be 
balanced.  There  may  not  even  be  agreement  on  just  how 
heavy  or  of  just  what  materials  a  particular  machine  or  its 
parts  must  be  made  in  order  to  stand  the  strain  of  everyday 
use.  Machines  may  be  built,  furthermore,  to  utilize  varying 
degrees  of  labor  in  the  performance  of  the  same  mechanical 
operation.  Here  are  opportunities  for  convincing  sales  effort 
on  the  part  of  competing  manufacturers.  Office  furniture  and 
equipment  may  be  of  oak  or  mahogany,  with  light  and  dark 
finishes;  they  may  be  of  steel  or  wood,  light  or  heavy  in 
structure.  There  are  also  constant  innovations  in  the  miture 
q{  specialties.  It  has  required  the  greatest  of  sales  "Sorts 
to  get  business  men  to  install  typewriters,  adding  machines, 
and  telephones;  demand  has  had  to  be  created.  Often,  too, 
equipment  is  bought  only  occasionally  or  in  small  quantities, 
and,  consequently,  the  care  and  time  may  not  be  used  in  the 
effort  to  get  the  lowest  price  for  a  particular  quality  that 
it  pays  to  take  with  the  larger  or  more  frequent  purchases. 
With  all  such  products,  then,  in  varying  degrees,  the  maniir 
fagturer  must  sell  on  a  basis  of  price  and  sexidce.  But  he 
may  also  need  to  utilize  definite  efforts  to  sdl_the_c[uality  and 
characteristics  of  his  product. 


MARKETING  MANUFACTURED  PRODUCTS    123 

Consumption  Goods. — The.  greatest  marketing  problems  are 
found  with  finished  goods  for  personal  consumption.  These 
are  manufactured  for  sale  to  the  ultimate  consumer  who  usu- 
ally buys  in  small  quantities.  He  is  not_skilled  in  purchas- 
ing, aiid  consequently,  must  depend  to  a  large  degree  on 
the  word  of  the  one  from  whom  he  buys.6  Here,  then,  is  a 
great  opportunity  for  demand  Creation.  Since  the  ultimate 
consumer  buys  a  great  many  different  kinds  of  merchandise 
in  small  quantities,  it  does  not  pay  him  to  spend  any  great 
amount  of  time  in  examining  the  less  important  qualities  of 
competing  products,  and  he  fciever  becomes  a  skilled  buyer  or 
a  careful  buyer  in  the  same  sense  as  do  the  purchasers  of 
production  materials,  equipment  and  supplies.]  Furthermore, 
goods  intended  for  personal  consumption  satisfy  intangible 
desires  and  their  characteristics  are  not  usually  subjected 
to  close  examination  and  measurement.  The  same  physical 
characteristics  appeal  tojdifferent  individuals  differently,  and 
to  the  same  individual  they  may  make  dittenng  appeals  at 
different  times  and  under  different  circumstances.  Finally, 
it  is  in  the  field  of  personal  consumption  that  so  many  new 
products,  to  gratify  new  and  often,  to  the  consumer,  unknown 
needs,  are  found — as  well  as  new  or  changed  products  to  meet 
well  known  wants.  In  such  cases  the  consumer  must  be  told 
of  the  product;  demand  must  be  created. 

Price  and  Service. — Price,  too,  is  important.  But  it  is  of 
far  less  relative  importance  than  in  the  sale  of  the  other  classes 
of  goods.  And  as  between  consumer  goods  it  plays  a  greater 
part  with  some  than  with  others.  It  is  more  important,  for 
example,  in  the  competitive  sale  of  sugar  and  flour  tlran  it 
is  in  the  competitive  sale  of  furniture  or  clothing. 

Service  is  particularly  important,  and  is  manifested  in  a 
variety  of  ways.7  It  is,  in  fact,  as  far  as  the  purchaser  is  con- 

"That  is,  he  must  do  this  until  he  has  thoroughly  tried  an  article 
himself. 

7  In  so  far  as  it  relates  to  selling  the  final  consumer,  service  will  be  dis- 
cussed in  the  chapters  on  retailing.  In  so  far  as  it  is  of  importance  with 


124  PRINCIPLES  OF  MARKETING 

cerned,  a  part  of  the  product,  a  part  of  the  thing  which  he 
is  purchasing.  But  as  it  is  not  physically  a  part,  it  is  usually 
considered  a  separate  item.  Indeed,  the  product  and  the  ser- 
vice rendered  in  connection  with  its  sale  may  have  to  be  con- 
sidered separate  elements  in  determining  its  exchange,  and 
each  be  paid  for  separately. 

Production  for  the  Market. — The  fact  that  consumers  buy 
a  large  variety  of  products  in  small  quantities,  many  of  them 
at  frequent  intervals  and  without  previous  notice  to  the 
supplier,  still  further  complicates  the  distribution  of  con- 
sumption goods.  Large  amounts  have  to  be  split  into  smaller 
quantities,  sometimes  at  two  or  more  stages  in  their  mer- 
chandising. This  occurs  when  staple  products,  such  as 
groceries,  drugs,  hardware,  and  dry  goods  are  sent  in  large 
quantities  to  wholesale  distributors,  and  then  are  divided  into 
smaller  lots  which  are  sent  to  retail  distributors,  who  finally 
divide  them  into  the  small  amounts  in  which  they  are  pur- 
chased by  the  final  consumer. 

Because  the  final  consumer  does  not  determine  on  his  pur- 
chases very  far  in  advance  such  goods  are  said  to  be  "prj> 
oluced  for  the  market,"  that  is,  they  .are  ^cpduced  in  advance 
oT_a^tuaJ---eonsumer  demand.  This  fundamental  situation  is 
'not  alterecTwhen  the  manufacturer  sells  on  contracts  made  in 
advance  of  production,  for  the  goods  are  then  held  for  the 
market  by  the  wholesale  and  retail  dealers.  There  is,  con- 
sequently, a  large  element  of  market  risk  in  merchandising 
consumer  goods.  Even  the  manufacturer  who  contracts  with 
the  wholesaler  in  advance  of  production,  and  the  wholesaler 
who  contracts  with  the  retailer  in  advance  of  the  "season," 
are  not  thereby  entirely  freed  from  this  risk.  For  if  the  final 
consumer  does  not  buy  in  the  quantities  and  at  the  prices 
anticipated,  contracts  may  be  cancelled  or  retail  buyers  may 
be  unable  to  meet  their  obligations. 

Selling  Consumption  Goods. — Semi-manufactured  products 

the  manufacturers  who  sell  consumer  goods  through  middlemen,  it  will 
be  discussed  in  the  chapters  immediately  following. 


MARKETING  MANUFACTURED  PRODUCTS    125 

and  equipment  and  supplies  are  exchanged  in  large  units  and 
the  sale  is  frequently  consummated  directly,  or  with  the  as- 
sistance of  a  broker.  They  are  also  sometimes  handled  by 
wholesale  merchants.  But  finished  products  for  personal  con- 
sumption are  almost  uniformly  purchased  from  retail  dealers. 
The  manufacturer's  immediate  selling  problem,  therefore,  is 
one  of  selling  the  retail  dealer.  Although,  as  will  be  shown 
later,  it  may  in  the  end  prove  to  be  a  double  problem — i.e.,  of 
creating  a  demand  for  the  product  on  the  part  both  of  the 
consumer  and  of  the  retailer — if  the  manufacturer  is  to  suc- 
ceed. But  that  demand  will  still,  usually,  be  felt  by  the 
manufacturer  through  the  retail  store. 

In  selling  to  the  retailer  the  manufacturer  has  the  choice 
of  selling  to  him  directly  or  of  utilizing  some  of  the  market 
intermediaries  who  act  as  middlemen  between  manufacturer 
and  retailer.  The  most  important  of  these  are  jobbers.  But 
functional  middlemen  of  exchange,  such  as  brokers  and  com- 
mission men,  who  operate  between  manufacturers  and  jobbers 
or  large  retail  organizations,  are  also  important. 

Ill 

Division  of  Market  Work. — There  are  three  basic  methods/ 
of   demand    creation: 7 personal    solicitation    (salesmen), lHha  Q 
use  of  symbols  (advertising  and  correspondence) ,5and  sampleiy 
— either  the  product  in  actual  use,  or  samples  carried  by  sales- 
men.   These  methods  may  be  used  by  the  manufacturer  and, 
in  addition  to  using  these,  he  may  depend  upon  the  assistance 
of  middlemen. 

The  manufacturer  may  create  a  demand  for  his  product 
with  his  own  efforts,8  or  he  may  depend  upon  middlemen  to 
create  this  market  for  him.  He  may  also  depend  in  part 
upon  his  own  efforts  and  in  part  upon  the  efforts  of  mid- 

8  This  is  sometimes  called  "direct  selling."  Sale  by  manufacturers 
directly  to  retailers  without  the  use  of  intervening  middlemen  is  also 
sometimes  called  "direct  selling." 


126  PRINCIPLES  OF  MARKETING 

dlemen;  utilizing  a  combination  of  his  own  agencies  with 
those  of  the  middleman.  He  may,  in  other  words,  cooperate 
with  the  dealers  who  sell  his  product  and  depend  upon  this 
combination  of  efforts  to  sell  his  goods.9  Practically  all 
manufacturers  utilize  the  retailer  in  the  sale  of  goods  for  per- 
sonal consumption,  although  there  are  important  exceptions, 
such  as  the  sale  of  many  household  utilities,  books,  and  type- 
writers. 

With  the  problems  of  physical  supply,  finance,  and  risk 
the  manufacturer  has  the  assistance  of  the  basic  service  in- 
dustries involved:  transportation  systems,  storage  plants, 
banks,  insurance  companies.  But  further  than  this,  other 
special  facilities  mayTiave  to  be  supplied.  And  in  his  co- 
operation with  these  basic  service  industries  he  may  act  alone 
or  he  may  act  with,  or  through,  the  same  middlemen  that 
are  involved  in  creating  a  demand  for  his  product.  Some  of 
these  activities  may  also  be  carried  on  by  the  final  purchaser, 
rather  than  by  the  producer  or  the  dealer.  In  the  sals  of 
most  staple  products  and  of  many  specialties  the  middlemen 
of  the  wholesale  market  are  so  important  in  placing  the 
product  in  the  hands  of  the  retail  dealer,  that  the  utilization 
of  such  agents  is  often  spoken  of  as  the  "orthodox"  method 
of  distribution,  and  any  departures  from  it  are  considered  "ir- 
regular." 

Channels  of  Distribution. — The  most  common  channels  of 
distribution  for  manufactured  products  ready  for  personal 
consumption  are: 

(1)  Sale  to  consumers 

(2)  Sale  to  retail  stores 

(3)  Sale  to  jobbers,  who  sell  to  the  retail  stores 

(4)  Sale  through  functional  middlemen  of  exchange,  who 

sell  to  the  jobbers,  who  sell  to  the  retail  stores. 

"See  Paul  Wesley  Ivey,  "The  Manufacturer's  Marketing  Problem," 
Administration,  Vol.  I,  No.  3  (Mar.,  1921),  pp.  341-47. 


MARKETING  MANUFACTURED  PRODUCTS    127 

1.  Sale  to  consumers. — The  direct  sale  of  products  from 
manufacturer  to  consumer  is  the  most  obvious,  and  from  some 
points  of  view  the  simplest,  method  of  distribution.  The 
cabinet  maker  and  the  custom  tailor  usually  produce  on  order 
for  the  ultimate  consumer.  But  this  channel  of  distribution 
is  by  no  means  confined  to  the  custom  trade.  The  products 
of  many  large  manufacturing  organizations  are  frequently 
sold  directly  to  the  consumer,  as  some  typewriters,  books, 
and  kitchen  utensils. 

Three  general  means  for  making  sales  directly  by  the  manu- 
facturer to  the  consumer  are  in  use:  (1)  advertising  (the  or- 
dinary "mail  order"  method),  (£)  salesmen,  and  (3)  retail 
stores  owned  by  the  manufacturer.  The  first  method  depends 
entirely  upon  advertising  and  correspondence  to  make  its  sell- 
ing appeal,  and  physical  distribution  is  made  through  the 
usual  channels  as  convenience  or  necessity  dictates,  although 
it  may  be  necessary  for  the  manufacturer  to  extend  credit 
and  to  furnish  his  own  warehousing  facilities.  Many  firms  do 
a  part  of  their  selling  in  this  way.  Some  middlemen  also 
utilize  this  method.  Thus  jobbing  houses  which  depend  upon 
salesmen  to  keep  their  trade  and  to  introduce  new  products 
likewise  encourage  customers  to  order  from  them  by  mail, 
and  some  jobbers,  such  as  Butler  Brothers  and  the  Baltimore 
Bargain  House,  depend  primarily  on  this  method.  As  a 
method  of  sale  the  distinguishing  characteristic  of  mail  order 
selling  is  the  use  of  some  medium  of  communication  other  than 
personal  solicitation  and  personal  contact  with  the  product. 
Obviously,  the  basic  methods  of  physical  distribution  will 
have  to  be  used,  although  such  facilities  as  are  normally 
furnished  by  middlemen  may  have  to  be  provided  by  the 
manufacturer. 

The  second  method  of  direct  sale  is  by  the  use  of  sales- 
men compensated  for  their  services  by  the  manufacturer.  In 
this  case  sales  are  made  through  personal  visitation  by  the 
manufacturer's  representative.  The  salesmen  may,  of  course, 


128  PRINCIPLES  OF  MARKETING 

perform  other  functions  than  selling,  such  as  demonstrating 
the  product  on  its  delivery,  adjusting  difficulties,  collecting 
accounts;  but  their  primary  work  is  to  sell.  Certain  cooking 
utensils,  as  well  as  cash  registers,  and  most  typewriters  are 
sold  in  this  way,  and  very  many,  perhaps  the  majority  of 
manufactured  goods  sold  to  other  manufacturers,  as  materials 
or  as  equipment  or  supplies,  are  sold  by  salesmen.  Wherever 
the  size  of  the  normal  order  and  the  margin  of  profit  are  great 
enough  to  warrant  the  time  and  expense  involved  in  such  solici- 
tation, there  is  usually  a  strong  preference  for  this  par- 
ticular kind  of  direct  sale.10 

Finally,  the  manufacturer  may  own  his  own  retail  stores. 
Through  them  he  comes  into  direct  contact  with  his  customers 
and  retails  his  products  to  them  just  as  is  done  in  any  retail 
store.  Some  brands  of  tobacco  products,  and  some  brands  of 
shoes  and  of  clothing  are  sold  in  this  manner.  In  so  far  as 
bakeshops  make  their  own  products,  or  candy  stores  their 
own  sweets,  this  direct  method  of  distribution  is  practiced.  It 
is  by  no  means  usual  for  a  manufacturer  to  depend  entirely 
on  his  own  stores  for  his  market.  His  retail  stores  frequently 
serve  as  an  experimental  means  of  contact  with  the  consumer, 
or  as  an  assured  market  for  part  of  the  output,  the  great  bulk 
of  the  product  being  retailed  through  independent  stores. 

2.  Sale  to  retail  stores. — The  addition  of  a  single  inter- 
mediary, the  retailer,  who  buys  the  product  of  the  manufac- 
turer and  in  turn  sells  it  to  the  consumer,  is  the  distinguishing 
characteristic  of  what  is  sometimes  called  the  manufacturer- 
retailer-consumer  channel  of  distribution.  Although  the 
manufacturer  may  endeavor  to  create  a  consumer  demand 
for  his  product  through  salesmen  or  advertising,  the  actual 
sale  is  here  consummated  at  the  retail  store.  Shoes,  men's 
clothing,  and  hats  are  familiar  examples  of  products  which  are 
often  sold  in  this  manner.  Certain  large  producers  of  cookies, 

1(>See  Chap.  VIII,  on  the  use  of  the  jobber,  and  Chap.  X,  on  the  con- 
ditions favoring  direct  marketing. 


MARKETING  MANUFACTURED  PRODUCTS    129 

crackers,  cakes,  confectionery,  soaps,  and  pickles  also  sell 
directly  to  retailers. 

3.  Sale  to  jobbers. — The  addition  of  a  second  middleman, 
the  jobber,  who  buys  of  the  manufacturer  and  sells  to  the 
retailer,  forms  what  is  known  as  the  manufacturer- jobber- 
retailer-consumer  channel  of  distribution.  It  is  used  by 
probably  the  larger  number  of  factories  producing  standardized 
goods  for  the  ultimate  consumer.  Such  staples  as  groceries, 
hardware,  drugs,  and  dry  goods  are  usually  sold  in  this  man- 
ner. For  such  it  is  often  called  the  "orthodox,"  "regular," 
or  "normal"  channel  of  distribution.  This  system,  unmodi- 
fied, would  mean  that  the  manufacturer  would  sell  to  the 
jobber  and  that  there  his  control  and  immediate  interest  in 
his  product  would  end;  the  jobber  would  sell  the  next  in  line, 
the  retailer,  and  there  his  control  and  immediate  interest  would 
end;  finally,  the  sale  by  the  retailer  to  the  consumer  would 
complete  the  distribution  of  the  product.  But  more  and  more 
manufacturers  follow  their  products  through  all  oT  the  steps 
enumerated,  watch  carefully  the  conditions  surrounding  their 
sale,  and  frequently  assist  from  point  to  point. 

By  means  of  advertising  and  salesmen  many  manufacturers 
who  sell  to  jobbers  are  now  exerting  considerable  influence 
upon  the  sale  of  their  product  at  each  point  in  the  channel  of 
distribution  where  a  change  of  ownership  takes  place. 
Through  so-called  "national"  advertising  in  magazines  and 
by  means  of  bill  boards,  electric  signs,  newspapers,  and  by 
circulars  and  direct  letters,  they  endeavor  to  create  a  con- 
sumer demand.  Through  advertising  and  personal  salesman- 
ship they  endeavor  to  sell  jobbers  and  retailers.  They  also 
try  to  influence  the  dealers  in  their  favor  by  assisting  them 
in  their  efforts  to  sell  the  consumer.  Their  efforts  to  sell  the 
consumer  assist  the  retailers  to  make  sales  to  consumers  and 
the  jobbers  to  sell  retailers.  And  through  this  means  and 
their  other  efforts  they  induce  the  dealers  to  supplement  these 
efforts:  the  retailers,  by  selling  the  consumers,  and  the  jobbers, 


130  PRINCIPLES  OF  MARKETING 

by  selling  the  retailers.  There  is  thus  established  a  degree 
of  cooperation  which  is,  if  successful,  of  mutual  benefit  to 
manufacturer  and  middleman. 

4.  Sale  through  functional  middlemen. — A  fourth  channel 
of  distribution  includes  another  middleman,  the  selling  house, 
which  represents^  the  manufacturer.  Such  a  middleman  com- 
monly takes  charge  of  the  sale  of  the  manufacturer's  product, 
selling  to  the  jobber  or» retailer  or  to  other  manufacturers.  For 
goods  intended  for  the  ultimate  consumer  this  usually  means 
the  addition  of  another  distributor  between  the  manufacturer 
and  the  jobber — a  distributor,  however,  who  usually  does  not 
own  the  product  he  sells,  but  who  handles  it  on  a  commission 
basis  for  the  manufacturer.  The  channel  of  distribution  then 
becomes  manufacturer  -  selling  -  agent  -  jobber  -  retailer  -  con- 
sumer.11 Many  textiles,  groceries,  and  hardware  products  are 
sold  in  this  way. 

In  a  few  trades,  notably  the  textile  trade,  there  are  middle- 
men who  represent  manufacturers  in  the  purchase  of  the  raw 
materials  and  manufactured  products  which  they  use  in  their 
own  factories.  When  these  dealers  are  buying  manufactured 
products,  as  cotton  in  the  grey  or  yarn,  they  may  purchase 
directly  from  the  manufacturer,  or,  in  case  the  latter  utilizes 
the  services  of  a  selling  agent,  they  may  purchase  through 
the  selling  agent;  and  then  both  parties  to  the  final  sale  are 
represented  by  a  middleman.  Wholesalers  who  merchandise 
many  products  sometimes  buy  through  such  middlemen,  and 
importers  of  manufactured  products  also  utilize  their  services. 

Middlemen  Perform  Other  Serviced. — The  great  service  of 
midcllemen  tojgostjnanuf acturers  is  me  effort  they  devote 
to  selling  jroods.  But  they  are  important  for  ot'ier  reasons, 
and,  although  many  manufacturers  attend  to  their  own  sell- 
ing, it  must  not  be  assumed  that  the  services  of  the  middle- 
men are  thereby  entirely  eliminated.  In  fact  the  efforts  of 

"See  Chap.  VIII,  also  L.  D.  H.  Weld,  "Marketing  Agencies  between 
Manufacturer  and  Jobber,"  Quarterly  Journal  of  Economics,  Vol.  XXXI, 
pp.  571-599. 


MARKETING  MANUFACTURED  PRODUCTS    131 

middlemen  are  seldom  confined  to  demand  creation.  They 
often  perform  an  important  part  in  financing,  in  physicaljis- 
tributipn,  and  in  the  assumption  oL risks.  The  selling  jigent 
of  the  manufacturer  may  merely  make  sales,  but  frequently 
he  guarantees  the  accounts  of  the  firms  to  whom  he  sells  and 
attends  to  the  collections.  The  jobber  usually  sellsjthe  prod- 
uct and  attends  to  its  phy^ical_jdistribution,  assumes  risk,  and 
assists  in  financing;  but  for  many  manufacturers  he  performs 
only  one  of  these  functions  or  even  a  part  of  one.  Sometimes 
the  jobber  merely  makes  the  sale  and  sends  the  order  to  the 
manufacturer,  who  attends  to  the  delivery  of  the  goods,  look- 
ing to  the  jobber,  perhaps,  for  payment.  On  the  other  hand, 
some  manufacturers  sell  their  own  product  but  send  the  order 
through  the  jobber,  who  attends  to  the  physical  distribution, 
assumes  the  risk,  and  collects  the  accounts.  Some  manufactur- 
ers send  out  specialty  salesmen,  who  drum  up  trade  for  their 
product  in  addition  to  that  procured  by  the  salesmen  of  the 
regular  dealers  through  whom  it  is  handled.  Some  advertise 
their  product  to  consumers  and  to  retailers,  although  the  final 
sales  to  the  consumer  are  made  and  distribution  is  attended 
to  by  jobber  and  retailer. 

Combination  of  Channels  is  Common. — Not  only  do  manu- 
facturers utilize  the  services  of  middlemen  in  varying  degree, 
but  the  same  manufacturer  may  use  more  than  one  channel 
of  distribution  for  his  goods.  One  cause  for  this  arises  out  of 
the  different  markets  in  which  he  may  be  selling.  In  selling 
a  national  market,  such  as  that  in  the  United  States,  the 
manufacturer  is  really  selling  in  a  number  of  different  kinds 
of  markets.  He  is  selling  in  large  cities,  in  small  cities,  and 
in  the  country.  In  the  large  city  he  may  decide  it  will  pay 
to  own  his  own  retail  stores,  or  at  least  to  do  his  own  jobbing; 
in  smaller  cities  he  may  find  it  best  to  use  the  "regular"  chan- 
nel of  distribution  through  jobber  and  retailer.  Again,  in  a 
single  cj.y  his  market  may  vary  from  the  kiosk  in  the  for- 
eign se<  ^ion  to  great  department  stores  and  exclusive  specialty 
shops.  Some  department  stores  buy  in  larger  quantities  than 


132  PRINCIPLES  OF  MARKETING 

do  many  jobbers,  and  by  reason  of  this  they  are  often  able 
to  buy  at  the  same  prices  as  the  jobber,  or  even  lower  than 
he.  Many  manufacturers  sell  to  any  dealer  who  will  buy, 
varying  prices  according  to  the  quantity  purchased  rather 
than  according  to  the  kind  of  dealer  or  consumer.  A  manu- 
facturer may  be  selling  directly  to  the  department  stores, 
whereas  other  business  houses  in  the  same  city  make  their 
purchases  only  through  the  jobber. 

In  different  sections  of  the  country  and  with  different  kinds 
of  trade,  the  hold  of  the  jobber  on  the  retailer  varies  in 
strength.  Such  local  preference  will  also  affect  methods.  In 
sparsely  settled  regions  the  manufacturer  may  decide  that 
he  can  get  more  sales  per  unit  of  expense  through  the  mail 
order  method,  or  through  the  jobber;  in  dense  areas  he  may 
do  his  own  jobbing  or  even  his  own  retailing;  and  he  may 
experiment  in  one  market  with  a  new  plan  of  sale  while  con- 
tinuing with  the  tried  and  sure  methods  in  the  remainder. 
Finally,  different  methods  are  often  used  in  the  foreign 
market  from  those  used  at  home,  and  a  manufacturer  who  has 
built  up  a  strong  trade  through  dealing  directly  with  the  do- 
mestic retailer  or  consumer  may  find  it  advisable  to  utilize 
middlemen  in  a  part  or  all  of  his  foreign  trade. 


CHAPTER  VIII 

WHOLESALE  MIDDLEMEN  OF  THE  MANUFAC- 
TURER'S MARKET:  THE  JOBBER 

To  know  the  functions  performed  by  middlemen  one  must 
turn  to  the  functions  involved  in  marketing,1  for  all  of  these 
can  be,  and  are,  performed  by  middlemen.  As  in  the  agri- 
cultural market,  so  in  the  manufacturers'  market,  there  are 
middlemen  who  perform  all  of  these  functions,  and  there  are 
agencies  highly  specialized  in  the  performance  of  one  func- 
tion or  of  a  part  of  one.  Examples  of  the  latter  are  such 
specialized  agencies  as  bankers,  insurance  companies,  and  ad- 
vertising agencies,  who  perform  their  particular  function  in 
the  marketing  of  many  kinds  of  products,  both  manufactured 
and  agricultural.  Examples  of  the  former  are  the  familiar 
jobber  and  retailer. 

The  Jobber.2  —  The  chief  service  of  the  jobber  in  marketing 
manufactured  goods  is  to  supply  the  retailer  with  merchan- 
dise. He  purchases  goods  in  large  quantities,  and  usually  in 
wide  variety,  divides  them  into  smaller  quantities  and  sells 
them  to  his  customers,  the  retail  merchants.  His  work  is  to 
assemble  for  the  convenience  of  the  retailer  the  products  the 
latter  supplies  to  the  consumer.  From  the  point  of  view  of 
the  manufacturer  whose  product  he  handles,  the  jobber's  func- 

1  See  Chap.  II. 

2  Historically  the  jobber  and  wholesaler  of  manufactured  goods  seem 
to  have  been  distinct  middlemen,  but  gradually  their  functions  have 
been  merged  until  today  the  terms  are  used  synonymously  in  practically 
all  trades.     Where  a  distinction  is  made,  the  term  ' 


to  those  operating  on  a  large  scale  and  covering  a  wio!e 
terri£oiy.  Thus,  the  trade~speaks  of  "wholesale  grocers"  and  of  "grocery 
jobbers"  —  the  latter  operating  on  a  smaller  scale. 

133 


134  PRINCIPLES  OF  MARKETING 

tion  is  to  disperse  manufactured  products.  But  that  is  inci- 
dental to,  and  a  necessary  accompaniment  of,  his  chief  office 
— to  assemble  the  products  which  the  retailer  wants ;  to  divide 
them  into  the  proper  sizes,  qualities,  and  varieties;  to  see  to 
it  that  they  reach  the  merchant  as  needed;  and  often,  through 
granting  credit,  to  assist  the  retailer  in  financing  his  business. 

The  Jobber's  Service  to  the  Retailer.— (1)  The  greatest 
service  performed  by  retail  merchants  for  consumers  is  to 
bring  together  at  convenient  places  the  products  which  the 
Consumer  is  in  the  habit  of  demanding  on  short  notice.  In 
the  marketing  of  staple  products,  however,  this  work  of  as- 
sembling is  to  a  large  extent  performed  by  jobbers.  It  is  often 
a  difficult  task  to  collect  the  various  commodities  which  con- 
sumers demand.  There  are  hundreds  of  manufacturers  pro- 
ducing articles  for  grocery,  hardware,  dry  goods,  and  drug 
stores.  To  receive  the  salesmen  of  such  firms,  to  answer 
their  letters,  or  to  pay  close  attention  to  their  selling  activities, 
is  impossible  for  any  but  the  largest  retail  stores.  The  cost 
of  buying  would  prove  to  be  too  great  a  burden  for  the 
smaller  stores.  *But  the  jobber  makes  it  his  business  to  keep 
in  touch  with  sources  of  supply,  and,  buying  goods  to  be  sold 
through  many  stores,  he  is  enabled  to  purchase  in  large  quan- 
tities and  so  to  reduce  the  unit  cost  of  assembly.  This  service 
is  particularly  important  when  many  different  products  are 
handled  in  a  single  concern.  T^n  case  the  establishment  handles 
but  a  few  lines  and  the  products  of  a  few  manufacturers,  as 
does  the  shoe  store,  the  men's  clothing  store,  the  automobile 
agency,  it  becomes  possible  for  the  retailer  to  do  business  di- 
rectly with  the  manufacturers,  and  consequently  middlemen 
are  less  used.  This  is  the  case  because  purchases  are  few 
and  the  quantities  involved  are  large.  But  even  in  such  lines, 
on  account  of  other  advantages,  the  jobber  is  often  utilized 
to  some  extent. 

(2)  |  The  division  of  large  amounts  into  smaller  is  an  im- 
portant service.  Manufacturers  find  it  advantageous  to  sell 
in  large  quantities  and  the  inducements  which  they  offer  in 


WHOLESALE  MIDDLEMEN:  THE  JOBBER      135 

the  form  of  quantity  discounts  and  free  deals  often  make  it 
unwise  for  small  stores  to  buy  directly.  It  is,  furthermore, 
often  impossible  to  buy  directly,  since  some  manufacturers  will 
not  sell  to  retailers,  particularly  small  ones.  Again,  large 
shipments  are  more  economically  handled  than  small,  and 
freight  rates  favor  quantity  shipments,  so  that  the  nearer 
the  product  can  be  moved  to  the  ultimate  consumer  in  large 
lots  the  more  economically  it  can  be  distributed.  This  renders 
such  a  service  indispensable  and  so  opens  the  way  to  the 
jobber — for  the  function  of  dividing  these  large  stocks  into 
the  smaller  quantities  which  retailers  buy  is  commonly  per- 
formed most  economically  by  an  agency  between  producer 
and  retailer.  Finally,  since  the  labor  of  assembling  is  most 
economically  performed  by  a  specialist — the  jobber — work- 
ing on  a  large  scale,  it  follows  that  he  is  often  the  logical 
medium  for  grading  and  dividing  and  arranging  the  goods  into 
the  qualities,  quantities,  and  groups  the  retail  dealers  desire. 

(3)  Another  important  function  which  the  jobber  performs 
for  the  retailer  is  the  granting  of  credit.     Many  retailers  would 
be  unable  to  begin  or  continue  their  business  if  they  had  to 
pay  cash  for  all  the  goods  they  buy.    This  makes  an  en- 
tering wedge  for  the  jobber.     If  he  has  sufficient  funds,  or 
can  get  credit,  he  is  enabled  to  carry  the  retailer  until  the 
latter  has  sold  a  sufficient  quantity  of  the  goods  to  be  able 
to  make  payment.3  •  In  fact,  some  retailers  are  kept  in  busi- 
ness in  this  way;  and  it  might  well  be  said  of  many  such  ar- 
rangements that  the  retail  stores  serve  as  outlets  for  the  job- 
bers' products  and,  through  this  granting  of  credit,  become 
mere  agencies  for  the  sale  of  the  jobbers'  product. 

(4)  As  a^specialist  in  distribution,  the  jobber  can  give 
other  valuable  assistance  to  the  retailer.    By  watching  the 

8 There  was  a  tendency  for  manufacturers  and  jobbers  to  shorten 
credit  periods  and  to  demand  cash  during  the  World  War,  but  it  does 
not  seem  to  have  continued  to  the  degree  it  had  been  hoped.  In 
fact,  the  slow  movement  of  products  in  recent  months  has  in  some 
cases  forced  the  lengthening  of  credits. 


136  PRINCIPLES  OF  MARKETING 

market  with  care  he  can  advise  as  to  what  goods  are  likely 
to  sell  best,  and  in  what  quantities;  he  can  also  advise  when 
to  drop  certain  lines  which  are  likely  to  lose  in  public  favor.4 
In  touch,  as  the  jobber's  salesmen  are,  with  hundreds  of 
retail  stores  and  with  the  market  in  general,  either  individually 
or  through  the  house,  they  are  able  to  give  the  retailer  many 
valuable  suggestions  which  an  intelligent  merchant  can  use 
advantageously. 

(5)  Again,  if  the  retailer  did  not  buy  from  the  jobber  he 
would  undoubtedly  be  in  need  of  much  larger  storage,  fa- 
cilities and  would  need  larger  financial  resources  than  he  usu- 
ally possesses.  Orders  to  manufacturers  must  often  be  placed 
far  in  advance  of  delivery  and  for  relatively  large  quantities, 
frequently  involving  more  goods  than  the  retailer  can  use  in 
months.  To  buy  in  this  way  would  necessitate  large  ware- 
housing facilities,  in  addition  to  large  financial  resources,  and 
would  force  the  retailer  to  bear  the  market  j*i§ks — the  risk 
of  falling  prices,  the  style  risk,  and  the  risks  of  physical  de- 
terioration involved  in  holding  goods  for  a  long  time  in  large 
amounts.  But  when  the  retailer  purchases  from  the  jobber 
he  can  buy  small  quantities  at  frequent  intervals  and  the 
jobber  bears  the  brunt  of  these  risks  and  cares  for  the  financing 
and  storing.  By  thus  allowing  retailers  to  order  in  small 
amounts,  the  jobber  assists  them  to  increase  the  rapidity  of 
their  stock-turns,  and  thereby  makes  possible  the  more  eco- 
nomical operation  of  the  large  number  of  small  retail  stores 
which  modern  consumers  demand.5  Most  manufacturers  find 

4  See  A.  W.  Shaw  Co.,  How  to  Run  a  Wholesale  Business  at  a  Profit, 
pp.  219-220. 

8 By  the  same  token,  however,  the  jobber's  stock-turn  is  thereby  low- 
ered, particularly  if  he  grants  credit.  But  it  seems  evident  that  the  total 
reserve  stock  necessary  to  supply  the  trade  of  say,  fifty  small  retailers 
would  be  less  if  held  in  one  central  warehouse  (the  jobber's)  near  the 
stores,  than  if  each  store  tried  to  carry  sufficient  stock  to  meet  the 
variations  in  its  trade.  This  is  true  because  the  variations  in  day  to  day 
demand  would  be  relatively  less  for  the  trade  of  fifty  stores,  with 


WHOLESALE  MIDDLEMEN:  THE  JOBBER     137 

it  too  expensive  to  handle  the  small  orders  of  the  average 
store,  and  are  not  able  to  make  quick  deliveries  of  small  or- 
ders, nor  are  they  willing  to  grant  credit  to  so  many  customers  ; 
indeed,  frequently,  they  have  not  the  financial  resources  to 
do  so.  The  jobber  performs,  then,  this  important  service  of 
carrying  reserve-steckg  upon  which  the-retailer  can  draw  from 
day__to  day  or  week  to  week  as  his  trade  demands. 

Summary.  —  From  what  has  been  said  it  appears  that  the 
chief  service  of  the  jobber  to  retail  dealers  is  to  assemble 
the  products  they  demand  —  tp  get  these  products  to  them 
pfomptlyin  the  proper  qualitiesT"ancl  quantities^  to  advise 
them  concerning  market  tendencies  and  merchandising  policies. 
to  finance  them  to  a  large  extent  in  their  selling  operations. 
and  to  relieve  them  of  the  storage  costsand  the_bmcUn  of 
"bearing  the  risk  which  would  be  involveiriri  t^ 


formance  of  these  functions.^ 

The  Jobber's  Service  to  the  Manufacturer.  —  Whereas  the 
jobber  aids  the  retailer  in  assembling  products,  he  serves  the 
manufacturer  in  dispersing  products  to  retail  dealers.  (1) 
Thejobber  ordinarily  buys  merchandise  outright,  and  takes 
upon  himself  the  problem  ol  selling  it  to  the  retail  trade,  as 
well  as  some  of  the  market  risks  and  storage  costs  the  manu- 
facturer would  otherwise  bear.  Instead  of  attempting  direct 
sales  to  the  retail  trade  the  manufacturers  who  sell  to  the 
jobber  virtually  turn  over  to  him  the  problem  of  selling  the 
retailer.  And  the  jobber  sometimes  affords  an  excellent  chan- 
nel of  distribution  for  the  manufacturer:  one  which  is  highly 
specialized  for  dealing  in  a  definite  field,  with  a  developed 
selling  organization,  an  existing  clientele,  and  a  knowledge 
of  the  prospective  market.  These  advantages  are  likely  to 
prove  of  inestimable  value  to  the  manufacturer,  and  to  offer 

reserve  stocks  in  the  jobber's  warehouse,  than  for  each  store  carrying 
its  own  reserves.  In  addition,  the  jobber's  business  is  large  enough  to 
cause  the  manufacturer  to  give  him  good  service,  and  so  he  can  get 
fast  deliveries  on  short  notice. 


138  PRINCIPLES  OF  MARKETING 

a  selling  service  which  he  could  not  duplicate  for  anything 
like  the  margin  between  the  price  received  from  the  jobber 
and  the  price  which  the  jobber  receives  from  the  retail  dealer. 

Handling  many  products  as  he  usually  does,  the  jobber 
can  work  a  given  market  more  intensively  than  can  most 
manufacturers.  In  an  out  of  the  way  territory  or  in  selling 
to  small  merchants  the  jobber  can  make  a  worth  while  profit, 
whereas  the  manufacturer  of  a  single  product  would  find  the 
selling  costs  prohibitive.  The  jobber  would  sell  many  dif- 
ferent articles;  so  the  total  bill  would  be  large,  and  the  costs, 
consequently,  would  be  spread  over  a  larger  order.  Thus,  in 
the  hardware  business  thousands  of  articles  are  listed  in  some 
of  the  larger  jobber  catalogues  and  many  varieties  of  a  given 
type  are  shown.6  For  the  manufacturers  of  most  of  these 
articles  to  approach  each  retailer  would  involve  not  only  a 
prohibitive  cost  to  the  manufacturer,  but  would  be  an  inex- 
cusable social  waste.  Only  manufacturers  who  are  producing 
a  wide  variety  of  goods,  such  as  Heinz's  "57  varieties"  or 
the  National  Biscuit  Company's  products,  or  manufacturers 
of  a  single  product  of  large  value,  such  as  typewriters,  or  of 
merchandise  bought  in  large  volume  by  retailers,  such  as 
shoes,  clothing,  meats,  can  approach  the  jobber  in  the  economy 
of  their  distribution  costs. 

(2)  Again,  as  has  been  noted,  the  jobber  performs  valuable 

'Inquiry  among  several  Chicago  jobbers  elicited  the  following  facts 
concerning  the  number  of  products  handled;  although  many  of  the 
articles  listed  are  not  kept  in  stock  by  the  jobber,  being  obtained  from 
the  manufacturer  as  needed.  A  large  hardware  company  handled  over 
50,000  items,  including  all  sizes  and  varieties  of  each  product.  Ignoring 
sizes,  over  30,000  items  are  handled.  Among  the  items  listed  in  their 
catalogue  were  51  different  paints  and  varnishes,  24  stoves  and  ranges,  34 
articles  in  saddlery,  36  agricultural  tools — and  each  of  these  in  several 
sizes.  A  drug  jobber,  handling  4,500  different  items,  lists  1,520  drugs, 
85  candies,  60  cigars.  A  jewelry  jobber  keeps  in  stock  460  different 
makes  of  watches,  258  makes  of  diamond  rings,  190  neckchains,  and  106 
makes  of  bar  pins.  A  paper  jobber  carries  among  other  things  286 
brands  of  bond  papers,  264  flat  papers,  93  ledger  papers,  36  linen  papers 
— each  in  40  different  sizes. 


WHOLESALE  MIDDLEMEN:  THE  JOBBER     139 

services  in  regard  to  transportation  and  storage.  A  few 
large  shipments  to  jobbers  take  the  place  of  hundreds  of 
smaller  shipments  to  retail  stores  and  are  made  throughout 
at  a  lower  cost.  The  jobber  stores  these  products  at  con- 
venient points  until  they  are  wanted  by  the  retail  trade.  As 
he  handles  many  products  which  are  constantly  coming  and 
going  a  given  storage  space  will  perform  more  service  for 
him  than  it  would  for  either  the  manufacturer  or  the  retailer ; 
and  he  can  afford  a  better  storage  organization  because  ad- 
ministrative expenses  will  be  less.  By  delivering  numerous 
articles,  rather  than  a  single  article  as  would  the  average 
manufacturer,  he  greatly  reduces  the  unit  cost  of  delivery. 

(3)  Just  as  the  jobber  gives  valuable  financial  assistance 
to  the  retailer,  so  in  some  instances  he  assists  the  manufac- 
turer.   This  assistance  ranges  from  direct  loans,  such  as  are 
sometimes  made  to  the  canners  of  fruits  and  vegetables,  to 
the  indirect  service  performed  in  carrying  the  accounts  of 
retail  merchants,  which,  if  the  jobber  were  eliminated,  would 
liave  to  be  carried  by  the  manufacturer  himself  if  existing 
credit  terms  continued.    Thejobber  frequently  contracts  to 
take  the  manufacturer's  product  before  the 

'^reduce;  and  lie  su  we  lime's  "advances  funds  to  him,  and  often 
pays  cash  for  his  product,  although  in  a  growing  number  of 
cases  the  jobber  is  given  credit  by  the  manufacturer.7  His 
financing  function  thus  assumes  large  importance.  On  the 
one  hand,  he  may  be  giving  credit  to  the  retail  dealers,  .and 
on  the  other,  he  may  be  buying  on  shorter  terms  than  those 
he  grants,  or  for  cash,  and  he  may  even  advance  funds  to  the 
manufacturer. 

(4)  The  existence  of  the  jobber  also  simplifies  the  manu- 
facturer's credit  problem.    Manufacturers  who  sell  directly 
to  retailers  may  have  to  carry  on  their  books  the  names  of 
thousands  of  retailers 8  and  to  keep  in  constant  contact  with 

7  See  pp.  336-341. 

8  Mr.  Parlin  estimated  in  1915  that  there  were  not  far  from  300,000 
grocery  and  general  stores  handling  groceries  plus  100,000  other  retail 


140  PRINCIPLES  OF  MARKETING 

all  available  sources  of  retail  credit  information.  The  jobber 
takes  this  work  from  their  shoulders,  which  leaves  simply  the 
need  to  obtain  credit  information  concerning  a  few  jobbing 
houses  that  are  usually  large  enough  to  have  their  rating  easily 
ascertained. 

Going  "Around"  the  Jobber. — By  no  means  all  manufac- 
turers, even  of  staple  lines,  utilize  the  services  of  the  jobber 
and  many  use  them  only  in  part.  The  combinations  of  direct 
marketing  with  marketing  through  the  jobber  are  various, 
.  and  the  number  of  manufacturers  who  do  this  and  of  those 
who  do  not  use  the  jobber  at  all  seems  to  be  growing.9  Some 
manufacturers  do  their  own  selling,  through  advertising,  sales- 
men, and  correspondence,  but  have  orders  sent  through  the 
jobber  who  carries  the  goods,  collects  the  accounts,  accepts 
repeat  orders,  and  performs  other  functions.  In  other  cases 
the  jobber  continues  to  sell  the  product,  but  through  the  means 
of  drop  shipmenta 10  part  of  the  work  of  physical  distribution 
is  shifted  to  the  manufacturer.  When  jobbers  sell  goods  in 
carload  lots,  the  carload  is  frequently  shipped  directly  from 
the  factory;  but  it  is  not  usually  economical  to  send  smaller 
shipments  in  this  way.  The  business  relations  in  such  cases 
vary  with  the  nature  of  the  services  performed,  the  relative 
power  of  the  manufacturer  and  jobber,  the  status  of  compe- 
tition, and  the  nature  of  the  market.11 

It  thus  appears  that  the  work  of  the  jobber  is  not  always 
the  same,  and  that  the  distribution  of  functions  between 
manufacturer  and  jobber  varies  greatly.  In  the  last  analysis, 
the  extent  to  which  the  jobber  is  used  by  a  manufacturer  is 
determined  in  part  by  the  relative  cost  of  different  methods, 

outlets  handling  foods.  See  C.  C.  Parlin,  An  Address  Delivered  before 
the  District  Sales  Managers  of  the  Joseph  Campbell  Company  (Dec.  28, 
1915),  p.  1.  (Pub.  by  The  Curtis  Publishing  Company). 

9  See  L.  D.  H.  Weld,  "The  Economics  of  Advertising,"  Printers'  Ink, 
July  11,  1918,  pp.  4-6. 

10  This  is  a  shipment  made  directly  from  the  factory,  when  the  sale 
has  been  made  by  the  jobber,  or  vice  versa. 

11  See  pp.  172  ff.  and  Chap.  XXI. 


in 


WHOLESALE  MIDDLEMEN:  THE  JOBBER      141 


part  by  the  financial  Resources  of  the  parties  involved,  and 
in  part  by  the  personal  ability  of  the  business  men.  That  is, 
under  fundamentally  similar  conditions  of  cost,  the  financial 
resources  and  the  ability  of  the  manufacturer  as  a  merchan- 
diser often  determine  the  extent  to  which  he  will  utilize  his 
own  efforts  rather  than  depend  on  those  of  the  jobber.  Where 
one  man  would  boldly  launch  a  direct  marketing  campaign, 
and  succeed,  a  second  would  launch  forth  as  boldly,  and  fail, 
and  a  third  having  less  imagination  and  initiative,  or  less 
confidence  in  his  own  merchandising  ability,  would  not  even 
make  the  attempt.  This  matter  of  the  personal  equation  of 
the  business  man  is  of  the  utmost  importance  in  determining 
and  in  explaining  the  merchandising  methods  of  individual 
firms,  and  is  a  frequent  cause  for  finding  widely  divergent 
methods  used  in  marketing  similar  products  under  apparently 
similar  conditions. 

Jobbing  Lowers  Costs. — Despite  these  personal  variations 
the  fundamental  fact  of  cost,  with  its  various  modifying  in- 
fluences, remains  the  most  important  consideration.  The  eco- 
nomic justification  for  jobbing  is  the  fact  that  it  lowers  the 
cost  of  distribution.  Where  the  service  to  be  rendered  in  dis- 
tributing a  given  product  from  producer  to  retailer  can  be 
most  economically  performed  by  the  jobber,  he  is  likely  to 
be  used.  It  is  obvious  then,  that  the  service  to  be  per- 
formed is  fundamental  to  any  determination  of  the  conditions 
which  make  thejuse  of  the  jobber  essential.12 

Jobbers  "Eliminate''  Manufacturers. — Just  as  the  manu- 
facturer is  going  into  the  field  of  the  jobber,  so  the  jobber 
is  going  into  the  field  of  manufacture,  and  there  are  today 
manufacturing-jobbers  as  well  as  manufacturers  who  do  their 
own  jobbing.  The  manufacturing- jobber  is  one  who  puts  out 
under  his  own  brand  or  under  one  which  is  identified  with  his 
name,  a  large  part  of  the  products  which  he  handles.  He  may 
manufacture  them  himself,  as  is  done  with  Lyon  and  Healy 

"The  discussion  of  these  conditions  has  simply  been  introduced  in 
this  chapter.  They  are  enlarged  upon  in  Chaps.  X  and  XIV. 


142  PRINCIPLES  OF  MARKETING 

pianos;  he  may  subsidize  manufacturing  plants  which  produce 
them — even  buying  the  entire  output  of  certain  plants — 
which  is  done  sometimes  with  canned  foods;  or  he  may  simply 
attach  his  own  brand  to  goods  bought  in  the  open  market  as 
wholesale  grocers  sometimes  do.  But  regardless  of  his  rela- 
tion to  manufacturers  the  product  is  identified  with  his  name 
rather  than  with  theirs.  XThis  intrusion  upon  the  manufactur- 
ing field  by  the  jobber,  and  the  invasion  of  the  jobbing  field 
by  the  manufacturer,  are  among  the  tendencies  of  greatest  im- 
portance in  marketing  manufactured  products.  And  the  gen- 
eral tendency  has  gone  even  further.  Both  of  these  have 
entered  the  retail  field,  and  retailers  in  their  turn  have  gone 
into  wholesaling  and  manufacture.  This  tendency  has  come 
about  because  of  the  intense  competition  for  sales,  and,  in 
turn,  it  has  made  that  competition  more  intense. 

Private  Brands. — One  result  of  the  intense  competition  for 
sfllfts  ha,s  been  the  introduction  of  private  brands  by  manufac- 
turers,  jobbers,  and  retailers.^  By  branding  the  products  which 
Tie  merchandises,  the  business  man  helps  to  retain  any  good 
will  which  his  aggressive  sales  efforts  have  created.13  The 
introduction  of  aggressive  selling  by  manufacturers  and  the 
fact  that  both  manufacturers  and  jobbers  brand  many  of  the 
products  which  they  merchandise  sometimes  gives  rise  to  ill 
feeling.  Some  of  the  reasons  for  the  introduction  of  jobber 
brands  will  be  given  at  this  point.1* 

(1)  Jobbers  sometimes  believe  that  manufacturers  who 
brand  their  products  and  assist  in  selling  them  to  retailers 
and  consumers,  take  advantage  of  the  control  they  are  able 
to  exercise  in  the  market,  by  reason  of  the  good  will  they 
create,  to  cut  down  the  profit  made  by  the  jobber  on  the  sale  of 
these  goods  to  such  a  point  that  he  makes  nothing  from 
handling  them.  In  order  to  fight  this  situation,  as  well  as  to 
gain  the  same  kind  of  good  will  for  their  own  wares,  many 

"See  Paul  T.  Cherington,  Elements  of  Marketing,  Chap.  XIV.    The 
question  of  brands  will  be  discussed  further  in  Chap.  XIX. 
"The  manufacturer's  position  is  discussed  in  Chap.  X. 


WHOLESALE  MIDDLEMEN:  THE  JOBBER      143 


jobbers  have  established  their  own  brands.  The  truth  behind 
this  situation  is  not  always  evident.  For  the  manufacturer,  OQ. 
the  other  hand,  claims  that  through  performing  ^p  flinj-- 
tion  of  demand  creation  himself  he  has  taken  awav  one  of 
the  greatest  expenses  which  the  jobber's  margin  formerly  cov- 
erecT  For  performing  the  function,  he  is  entitled  to  the  part 
of  that  margin  which  covered  that  expense  under  the  old  sys- 
tem. Apparently  this  is  a  question  of  fact.  If  the  manu- 
facturer does  create  the  demand,  he  surely  should  no  longer 
pay  the  jobber  for  doing  it.  Whether  he  takes  advantage  of  his 
power  in  the  market  to  exact  even  more  than  this  cannot  be 
readily  ascertained  in  most  cases.  Although  it  seems  improb- 
able that  many  manufacturers  have  created  a  consumer  de- 
mand strong  enough  to  overcome  the  antagonism  which  such 
a  price  policy  would  involve,  the  fact  that  a  few  have  done 
so  makes  the  jobber  suspicious  of  all  similar  selling  efforts. 
If  the  dealer  thinks  the  manufacturer  is  allowing  too  small 
a  margin,  or  if  he  fears  that  the  margin  will  ultimately  be 
cut,  it  gives  rise  to  as  much  ill  will  in  the  relations  between 
them  as  though  it  were  the  actual  fact.15 

(2)  In  other  cases,  the  jobber  fears  that  after  he  has  spent 
time  and  money  in  building  up  a  demand  tor  the  manufac- 
turer's product,  the  manufacturer  will  decide  to  sell  to  re- 
tailers himsell,  or  to  sell  to  some  other  jobber.  Since  the 
product  is  branded,  he  would  lose  the  demand  tor  it,  even 
though  he  had  borne  the  cost  of  creating  that  demand.  The 
effort  spent,  if  it  had  been  applied  to  a  product  bearing  the  job- 
ber's own  brand,  would  have  brought  permanent  trade  and  good 
will.  To  protect  against  this  possibility,  the  jobber  may  intro- 
duce a  competing  brand  of  his  own,  and  thus  cause  ill  feeling 
on  the  manufacturer's  part,  and  perhaps  hasten  the  severance 
of  business  relations.  Even  though  the  jobber  has  expended 
little  or  no  time  and  money  in  demand  creation,  the  loss  in 
good  will  when  a  branded  product  is  taken  from  him  has  still 

15  Cherington  lays  the  private  brand  "problem"  largely  at  the  door  of 
"concentrated"  retailers.    See  his  Elements  oj  Marketing,  pp.  151-5. 


144  PRINCIPLES  OF  MARKETING 

to  be  faced.  For  although  the  manufacturer  may  have  taken 
the  entire  burden  of  creating  the  demand,  when  he  takes  the 
product  away  from  the  jobber  he  leaves,  thereby,  a  hole  in  the 
jobber's  sales  which  may  prove  difficult  to  fill.  Finally,  the 
whole  tendency  toward  "direct"  marketing  is  Against.  fhfijnh- 
ber's  fundamental  interest.  If  enough  producers  do  this,  there 
wnTTeiiiam  no  ne^d  far  l;he  jobber's  service. 

(3)  Another  important  reason  which,  undoubtedly,  in- 
duces the  jobber  to  sell  his  own  private  brands  is  the  desire 
jx>  gain  control  of  the  market  in  certain  products  for  which 
he  sees  there  is  likely  to  be  a  brisk  demand,  and  to  take  ad- 
vantage of  advertising  as  a  selling  force.  Since  it  is  in  the 
sale  ol  these  more  lucrative  lines  that  direct-selling  manu- 
facturers tend  to  appear,  the  jobber  must  do  this  in  self-protec- 
tion, if  not  for  more  positive  reasons.  Otherwise  he  will  find 
that  he  has  lost  his  most  valuable  trade  to  the  direct-selling 
producers. 

The  development  ofjtdvertisinfr  has  without  Hrmbt,  evprfpH 
an  influence  on  the  private  brand  problem.  Its  part  in  arous- 
ing antagonism  between  jobber  and  manufacturer  has  just 
been  mentioned.  But  it  has  a  more  positive  influence  with 
the  jobber*  ^  Realizing  the  advantages  of  advertising  and 
branding  to  demand  creation,  the  jobber  has  seen  that  he  may 
increase  his  clientele  by  advertising  brands  which  only  he  can 
sell.16^By  developing  his  own  factories  or  subsidizing  manu- 
facturers, as  the  case,  may  be,  he  is  assured  of  a  steady  supply 
of  products  with  no  danger  of  losing  it  to  another  jobber,  and 
with  less  danger  of  losing  trade  through  the  refusal  of  a 
manufacturer  to  sell  him  any  more  goods.  For  even  though 
a  given  producer  refuses  further  supplies  the  jobber  can  usu- 
ally find  others  who  can  make  the  goods.  Anol,  since  the 
brand  is  his  own,  no  loss  in  trade  need  follows*  The  larger 

16 The  jobber,  like  the  manufacturer,  may  sell  the  same  or  similar 
goods  under  more  than  one  brand.  Sprague,  Warner .  and  Co.,  for 
example,  sell  groceries  under  three  brands,  allowing  one  grocer  in  each 
community  to  have  the  exclusive  sale  of  one  brand.  Thus  their  goods 
may,  because  of  the  three  brands,  be  sold  through  three  stores. 


WHOLESALE  MIDDLEMEN:  THE  JOBBER      145 

jobbers,  furthermore,  have  high  selling  costs,  and  the  intro- 
duction of  advertised  brands  shifts  some  of  the  sales  emphasis 
from  price  to  quality,  and  so  assists  in  the  competition  with 
smaller  jobbers  operating  at  a  lower  cost. 

(4)  Another  reason  which  has  been  advanced  is  that  by 
branding  merchandise  the  jobber  is  protected  against  his  owiT 
'salesmen.    Jobbers  who  depend,  as  most  of  them  do,  upon" 
their  salesmen  to  create  and  maintain  trade,  have  sometimes 
found  that  much  of  their  trade  was  not  really  their  own,  but 
came  to  them  because  of  the  personality  of  their  salesmen. 
This  has  put  the  salesman  in  a  very  strong  bargaining  posi- 
tion, enabling  him  to  threaten  to  take  his  customers  with  him 
to  a  competitor  if  his  demands  are  not  met  by  the  jobber. 
Although  this  is  heard  of  less  now  than  in  the  past,  it  is  still 
important.     When  the  jobber  handles  his  own  exclusive  brand 
of  goods,  his  salesmen,  to  a  greater  degree,  create  a  demand 
for  these  brands,  as  well   as   for  the  jobber's  service,   and 
there  is,  then,  less  danger  of  the  loss  of  customers  when  popu- 
lar salesmen  leave  the  house. 

(5)  Of  perhaps  minor  importance  is  the  claim  of  the  iobbeg- 
that  he"canj5ell  goods  of  better  quality  whpn  hp  oversees  their 
manufacture.    It  is  probably  true,  at  least,  that  he  can  in  this 
way,  be  certain  of  more  uniform  quality,  a  valuable  asset 
to  him  because  his  own  irade  suffers  when  a  manufacturer's 
products  are  not  as  represented.     A  counter  claim  is  madfL. 
however,  by  manufacturers  that  jobbers  brand  the  surplus 
products  jmdjjie  left-overs  of  p|flpts  spiling  under  their  own 
brjind.  alacTthat  in  no  case  can  th^y  pyprmgp  flip  same  super- 
vision  over  production   |.hat.  the  manufacturer  himself  can 
exercise.      Here  again,  no  general  statement  can  be  made. 
The  truth  cannot  be  known  in  most  cases,  for  conditions  would 
vary  with  different  jobbers  and  different  products,  as  well  per- 
haps as  with  different  seasons  of  the  year,  when  the  volume 
of  trade  varies.     Many  manufacturers  who  sell  under  their 
own  brand  also  sell  unbranded  goods  to  jobbers  or  retailers' 
andeven  to  botn.     Tnis  is  often  done  as  a  definite  policy? 


146  PRINCIPLES  OF  MARKETING 

Two  well  known  drug  manufacturers  sell  under  their  own  trade 
name,  but  they  also  sell  goods  on  which  they  will  place  the 
retailer's  brand.  And  an  aluminum  cooking  utensil  company 
handles  two  branded  and  one  unbranded  line,  in  order  to 
sell  to  different  classes  of  dealers.  Since  the  goods  sold  in 
these  cases  are  not  "left-overs"  but  are  sold  to  the  dealers 
with  the  purpose  of  building  a  permanent  trade,  the  objection 
mentioned  above  would  hardly  apply.  But  it  may,  never- 
theless, be  true  that  in  some  lines,  such  as  canned  foods,  left- 
over stocks  or  "seconds"  are  sold  to  dealers,  unbranded. 

Integration. — It  is  obvious  that  the  jobber  who  controls  his 
own  factories,  and  in  less  degree  even,  the  jobber  who  brands 
the  products  of  Independent  manufacturers,  as  well  as  the 
manufacturer  who  does  his  own  jobbing,  are  performing  the 
same  functions.  But  there  is  a  difference  in  emphasis  and 
in  point  of  view.  Jn  one  case,  integration  is  taking  place  from 
the  factory;  in  the  other,  from  the  market.  The  manufac- 
turer  does  not  always  sell  all  his  products  through  his  own 
selling  organization;  at  least,  he  does  not  always  do  all  of 
fcs  own  jobbing;  and  the  jobber,  seldomT  if  ever,  manufac- 
tures or  even  controls  the  manufacture  of  all  the  products  he 
sells.  Both  are  sports  in  our  present  system  of  marketing, 
and  both  point  to  the  saifietendencv — the  attempt-jto-gain 
Control  of  the  market .  through  the  integration  of  manufactur- 
ing witE  marketing/' 

Jobber  Types.-^Most  jobbers  confine  their  efforts,  jto  the 
goods  carried  by  the  class  of  stores  to  which  they  sell.  These 
lines  are  often  very  wide,  as  with  dry  goods,  hardware, 
grocery,  and  drug  jobbers.  And  even  more  specialized  lines, 
such  as  jewelry,  paper,  and  musical  instruments,  include  a 
large  number  of  individual  products.  A  few  houses,  like  But- 
ler Brothers  and  the  American  Wholesale  Corporation,  which 
supply  general  stores,  carry  an  extremely  wide  range  of  prod- 
ucts. Flour  jobbers  and  shoe  jobbers,  on  the  other  hand,  con- 
fine themselves  to  a  narrow  line  of  merchandise.  And  there 

17  The  same  tendencies  are  evident  in  retailing.    See  p.  215. 


WHOLESALE  MIDDLEMEN:  THE  JOBBER      147 

are,  as  in  the  dry  goods  field,  so-called  "^specialty  jobbers" 
who  sell  only  notions,  silks,  ready-to-wear,"  knit  goods,  dress 
goods,  white  goods,  or  linens.  There  are  also  manufacturers 
of  single  products,  which  are  part  of  a  wider  line  sold  to 
retailers  or  producers,  who  job  a  few  products  made  by  other 
manufacturers,  so  that  they  can  fill  orders  for  a  wider  va- 
riety of  products.  This  makes  selling  easier  and  less  costly. 
Manufacturers  of  building  materials  and  machinery,  for  ex- 
ample, sometimes  do  this. 

National 'Jobbers. — The  volume  of  business  and  the  size  of 
the  territory  covered  also  vary  greatly.  In  thejjtapje.  lines,, 
three  important  classes  of  jobbers  are  discernible*  the  national 
jobber,  the  district  jobber,  and  the  local  jobber.  The  na- 
r)  tional  or  large  general  jobbers  are  located  at  such  strategic 
centers  as  New  York;  Chicago,  and  St.  Louis.  New  York 
in  particular  was  formerly  a  center  for  national  jobbers, 
because  it  was  the  port  through  which  large  quantities  of  Euro- 
pean manufactures  came  into  this  country;  and  it  had  an  ex- 
,  cellent  location  in  the  center  of  American  manufacture  and 
consumption,  with  adequate  transportation  facilities  for  reach- 
ing outlying  districts.  But  in  recent  years  population  has 
spread  to  the  West  and  South,  manufacturers  have  developed 
in  America,  and  the  manufacturing  area  has  gradually  spread 
with  the  expanding  population;  while  improved  transport  has 
rendered  other  large  cities  commercially  nearer  these  develop- 
ing districts  than  is  New  York.  There  has  developed,  more- 
over, a  retail  demand  for  prompt  and  quick  delivery  of  goods 
in  small  quantities.  For.  these  reasons  New  York  has  gradu- 
ally lost  its  relative  importance  as  a  wholesale  center.  The 
large  general  jobbing  business  which  formerly  centered  in 
New  York  has  shifted  in  large  part  to  Chicago,  St.  Louis, 
Denver,  and  the  coast  cities.  The  large  jobbing  houses  located 
at  these  points  are  not,  however,  exactly  like  the  national 
jobbers  of  former  times.  Their  territory,  in  particular,  is 
more  limited. 

District  and  Local  Jobbers. — More  recently  small  jobbing 


148  PRINCIPLES  OF  MARKETING 

houses  have  developed  which  are  assuming  the  predominant 
place  in  staple  trades.'"  These  are  of  two  general  classes. 
First,  are  those  jobbers  who  operate  in  areas  extending  for 
two,  three,  or  four  hundred  miles  from  a  given  city;  and 
second  are  the  purely  local  jobbers  who  operate  in  a  large 
cffy,~or  part  "of  a  large  city,  or  in  a  small  city  and  the  cities 
and  towns  near-by.  In  the  wholesale  grocery  business,  for  ex- 
ample, distinction  has  been  drawn  between  national  jobbers, 
district  jobbers,  and  local  jobbers.  The  latter  are  the  pre- 
dominant factor  in  the  distribution  of  food  products  which 
are  handled  through  jobbers.  In  1915  the  Curtis  Publishing 
Company  found  that  over  one-half  (53.33  per  cent)  of  the 
grocery  business  passing  through  jobbing  channels  was  han- 
dled by  2,768  local  jobbers  each  doing  less  than  a  one  million 
dollar  business,.  Nearly  one-third  (32.4  per  cent)  of  the  busi- 
ness was  done  by  316  firms  which  were  classed  as  "semi-sec- 
tional," and  doing  a  business  of  between  $1,000,000  and 
$4,000,000  each.  Large  sectional  jobbers,  of  whom  there 
were  twenty-five,  with  a  business  running  over  $4,000,000 
each,  did  9.27  per  cent  of  the  business.  And  six  national  job- 
bers did  but  5  per  cent  of  the  business,  although  their  com- 
bined business  was  over  $75, 000,000. 18  Mr.  Parlin  in  giving 
reasons  for  the  continued  growth  and  importance  of  the  local 
jobber  cited,  among  otEers,  tnT  fact  that  as_such jobberS-Tlto 
no£-brsrrrd"tKeir  product,  whereas  sectional  jobbers  do,  national 
advertising  manufacturers  "more  and  more  turn  to  local  job-, 
bers  for  distribution,  and  throw  the  powerful  weight  of 
national  advertising  behind  the  local  jobber." 19  This  ten- 
dency for  local  jobbers  to  develop  is  found  in  other  staple 
lines.20 

18  C.  C.  Parlin,  An  Address  Delivered  before  the  District  Sales  Man- 
agers of  the  Joseph  Campbell  Company  (1915),  pp.  5~6  (Pub.  by  the 
Curtis  Publishing  Co.). 

"Ibid.,  p.  7. 

20  For  an  interesting  discussion  of  the  different  types  of  dry  goods 
jobber — (1)  general  dry  goods  jobber,  (2)  specialty  jobbing  house,  (3) 


WHOLESALE  MIDDLEMEN:  THE  JOBBER     149 

Local  Jobbers. — There  seems  to  be  no  question  of  the  trend 

VtaMMM^B^^*^01^  M^HMM*«MkMMM^HMB^MHMMMM»"""OTMVa^M>"BIIM^ 

toward  local  jobbing^  Even  manufacturers  who  sell  to  retail- 
ers are  forced  to  recognize  the  factors  which  are  behind  this 
movement,  and  to  establish  branch  sales  districts  and  ware- 
houses. National  jobbers,  likewise,  have  had  to  establish 
branches  in  order  to  compete  successfully  with  this  ten- 
dency.^ There  continue,  however,  despite  this  policy  of  the 
national  jobbers,  to  be  certain  distinct  advantages  to  local 
jobbing,  especially  in  the  merchandising  of  staple  lines. 
Staples  are  sold  primarily  on  a  price  basis.  This  is  particu- 
larly true  in  their  wholesale  distribution,  for  the  retailer  wants 
to  buy  such  products  at  the  lowest  possible  cost.  ,  Here  the 
local  jobber  seems  to  have  distinct  advantages.  ^He  is  in 
direct  charge  of  his  business  and  has  n&  hiflh  administrative 
expenses  for  efforts  directed  solely  to  controlling  a  large  or- 
ganization. He  can  keep  in  direct  :personal  contact  with 
Jiis  customers,  thereby  establishing  a  personal  good  will  which 
makes  selling  easier,  and  he  can  keep  in  close  personal  touch 
with  credits. 

The  advantages  of  the  local  jobber  are  shown,  so  far  as  ex- 
penses are  concerned,  by  consulting  Tables  V  and  VI  at  the 
end  of  this  chapter.  On  the  assumption  that  the  smaller  job- 
bers are  the  local  jobbers  clear  advantages  in  expense  are 
showai  The  reader  must  be  warned,  however,  that  the  whole 
story  is  not  told  by  these  figures.  The  rate  of  turnover,  in 
particular,  is  not  given,  and  this  may  have  an  important 
bearing  on  prices  and  profits.  Furthermore,  the  larger  jobbers 
are  often  manufacturers  in  some  degree,  manufacturing  some 
of  their  own  products  and  placing  their  own  brands  on  many 
others.  It  is  entirely  possible  that,  considering  this,  a  com- 
parison of  this  kind  is  inaccurate,  since  the  sales  expense  for 
selling  manufacturers'  goods  is  divided  between  the  manu- 

local  general  jobber,  (4)  small  local  jobbing  house,  (5)  catalogue  jobbing 
house,  (6)  drop  shipper — see  Cherington,  The  Wool  Industry,  Chap.  IX. 
21  See  E.  C.  Simmons,  "A  Half  Century  in  Hardware,"  Iron  Age,  Vol. 
77  (Jan.  4,  1906),  pp.  145-148. 


150 


PRINCIPLES  OF  MARKETING 


facturer  and  the  local  jobber,  whereas  the  large  jobber's 
expense  includes  both  types  of  sales  cost.  Some  of  the  ten- 
dencies shown  in  these  tables  illustrate  the  conditions  which 
are  thought  to  favor  local  jobbing.  Those  conditions  which 
have  not  already  been  discussed  will  now  be  mentioned. 

JThe_salesmeja  of  the  local  jobber  cover  a  small  territory 
intensively  and  live  at  home  most  of  the  time,thus  reducing 
tHeir  expenses.  And  many  orders  are  taken  by  the  drivers  of 
his  delivery  wagons.  All  of  this  keeps  costs  down.  Delivery 
expense  is  likewise  small,  for  the  local  jobber's  wareFoiise'ls 
near  his  customers  and  the  cost  of  making  the  small  deliveries 
the  trade  demands  can  be  kept  down.  This  also  enables  him 
to  make  quick  xJeliveries  on  short  notice.  Because  of  the  mod- 
ern emphasis  on  rapid  stock-turns  the  local  jobber  has  a  dis- 

TABLE  V 

Wholesale  Expense  Percentages  for  Different  Volumes  of  Business  and 
Different  Lines* 


Volume  of  Annual 
Sales 

Groceries 

Hardware 

Clothing 

Electrical 
Goods 

Over  $1,000,000  

T.f 
% 
10.3 

A.f 

% 
8.8 
7.5 
6.3 

T. 

% 
23.5 
19.2 

17.8 

A. 

% 
18.8 
16.7 
14.9 

T. 
% 
17.8 
16.1 

A. 

% 
15.6 
12.8 

*_ 

18.1 
17.0 

A. 

% 

15.7 
13.3 

$500,000  to  $1,000,000 
Under  $500,000  '. 

9.0 
7.2 

*  A.  W.  Shaw  Company,  How  to  Run  a  Wholesale  Business  at  a  Profit 
(1918),  pp.  xix-xxv. 

f  "T"  means  typical  data,  "A"  means  results  which  are  thought  to  be 
attainable  by  the  average  firm  in  each  class. 


tinct  advantage  from  this  fact,  i.e.,  that  his  stock  is  nearer  to 
the  retailer  than  is  the  stock  of  the  larger  jobber  whose  head- 
quarters are  more  remote.  With  the  higher  freight  rates  now 
prevailing,  this  advantage  will  be  even  greater,  for  the  local 
jobber  can  make  many  deliveries  by  truck  and  the  rail  hauls 
from  his  warehouse  to  his  customers  are  short. 

The  sectional  jobber,  for  similar  reasons,  has  lower  costs 
than  the  national  jobber,  but  higher  costs  than  the  local  job- 
ber. In  the  grocery  line  the  sectional  jobber  has  been  adopt- 
ing a  private  brand  policy,  in  part  so  that  he  will  not  be 


WHOLESALE  MIDDLEMEN:    THE  JOBBER     151 


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152  PRINCIPLES  OF  MARKETING 

forced  to  compete  on  a  price  basis  with  the  local  jobber.22 
It  is  interesting  that  the  figures  of  Table  VI,  almost  without 
exception,  show  that  the  selling  costs  (selling  expense  23  and 
advertising),  administration,  packing  and  shipping,  and  bad 
debts  appear  larger  with  the  larger  houses. 

22  C.  C.  Parlin,  op.  dt.,  pp.  4,  6. 

23  Sales  force  expense  per  net  sales,  however,  has  been  found  to  de- 
crease as  the  business  increases  in  size.     Harvard  Bureau  of  Business 
Research,  Bui.  No.  14,  Methods  of  Paying  Salesmen  and  Operating  Ex- 
penses in  the  Wholesale  Grocery  Business  in  1918,  p.  19. 


CHAPTER  IX 

WHOLESALE  MIDDLEMEN  OF  THE  MANUFAC- 
TURER'S MARKET  (Continued) 


The  chief  purpose  of  the  present  chapter  is  to  discuss  the 
work  of  certain  highly  specialized  marketing  agencies,  includ- 
ing those  middlemen  of  exchange  who  operate  mainly  between 
the  manufacturer  and  the  jobber.1  The  middlemen  of  ex- 
change are  known  by  various  names  in  different  trades. 
Among  them  are  commission  or  selling  houses,  manufacturer's 
selling  agents,  brokers,  ana  purchasing  agents!  The  general 
advantages  and  economies  which  result  from  their  efforts  will 
be  described  at  this  point. 

These  middlemen  usually  perform  but  few  of  the  marketing 
functions.  Tjigjr  principal  activity  consists  in  arranging  for 
the  exchange  of  title  to  goods,  and  they  serve  the  manufac- 
turer through  taking  over  his  sales  problem.  Their  sales  ser- 
vice is  particularly  important  to  small  manufacturers.  Thus, 
hardware  products  are  commonly  manufactured  by  many  in- 
dependent firms,  each  making  but  a  few  special  articles  or 
a  limited  line  of  products.  Only  large  manufacturers  can 
afford  a  sales  organization  sufficiently  effective  to  sell  the  trade 
directly.  But  the  manufacturer's  agent  offers  a  selling  or- 

1  For  an  excellent  general  discussion  of  middlemen  functioning  between 
manufacturer  and  jobber  see  L.  D.  H.  Weld,  "Marketing  Agencies  be- 
tween Manufacturer  and  Jobber,"  Quarterly  Journal  of  Economics,  Vol. 
XXXI,  pp.  571-599;  see  also  the  Reports  of  the  Federal  Trade  Com- 
mission on  canned  goods,  coal,  newsprint  paper,  etc.;  M.  T.  Copeland, 
The  Cotton  Manufacturing  Industry  of  the  United  States,  pp.  209-215; 
and  P.  T.  Cherington,  The  Wool  Industry,  pp.  109-127. 

153 


154  PRINCIPLES  OF  MARKETING 

ganization  for  these  smaller  firms,  and  by  combining  several 
products  he  is  able  to  sell  the  trade  at  a  low  unit  cost.  Such 
middlemen  sometimes  assist  the  manufacturers -in  their  finon* 
ciul  problems.  This  has  been  common  in  the  textile  trades, 
and  is  not  uncommon  in  the  hardware  field.2  In  the  grocery 
trade,  in  addition  to  the  sale  of  staple  canned  foods,  they 
have  sometimes  helped  to  introduce  branded  specialties.3  _By__ 
the  combination  in  their  operations  of  the  output  of  several 
manufacturers,  selling  is  usually  accomplished  at  a  lower  unit 
cost  than  would  be  possible  for  the  individual  manufacturers. 
It  has  been  shown  that  the  manufacturer  cannot  usually  afford 
a  sales  department  which  will  reach  the  retail  trade  or  the 
final  consumer.  Furthermore,  he  often  finds  it  desirable  to 
devote  all  of  his  time  to  the  work  of  production.  And  for 
the  same  reasons  he  often  finds  it  inadvisable  to  try  to  sell 
the  very  large  number  of  jobbers  and  other  large  buyers  found 
in  some  trades. 

These  middlemen  serve  the  buyers  as  well,  for,  as  they 
handle  several  varieties  of  a  product  or  a  single  variety  in 
large  amounts,  the  various  goods  demanded,  and  sufficient 
quantities  of  each,  can  be  purchased  through  one  agency  at 
a  minimum  of  trouble  and  cost.  And  not  only  do  these  mid- 
dlemen sometimes  finance  the  manufacturers  whose  products 
they  sell,  but  they  may  likewise  render  assistance  to  the  pur- 
chasers who  buy  through  them.  They  do  little  warehousing 
as  a  rule,  and  with  the  exception  of  the  commission  men, 
usually  assume  no  risk  and  do  no  financing.  It  is  safe  to 
say  that  they  are  chiefly  engaged  in  the  work  of  buying 
and  selling:  not  on  their  own  account,  but  in  assisting  other 
parties  to  consummate  sales.  The  financial  assistance  some- 

2Cherington,  op.  cit.,  p.  121. 

'Certain  grocery  products,  such  as  Kellogg's  "Toasted  Corn  Flakes" 
and  "Cream  of  Wheat,"  were  introduced  in  this  manner,  although 
they  have  since  been  taken  over  by  the  manufacturer's  own  selling 
department.  See  L.  D.  H.  Weld,  "Marketing  Agencies  between 
Manufacturer  and  Jobber,"  Quarterly  Journal  oj  Economics,  Vol.  XXXI 
(1917),  pp.  586-589. 


FUNCTIONAL  MIDDLEMEN  155 

times  rendered  is,  nevertheless,  important.  But  manufactur- 
ers and  buyers  are  coming  to  have  a  stronger  financial  stand- 
ing and  are  able  more  and  more  to  dispense  with  this  ser- 
vice, and  as  manufacturers  grow  in  size  and  resources,  they 
are  often  able  to  dispense  with  the  exchange  service  as  well. 

(i)  Commission  Houses. — Commission  houses,  which  are 
known  to  the  law  as  factors  and  which  are  also  called  sell- 
ing houses,  are  now  found  in  the  textile  trades  functioning  as 
intermediaries  between  the  mills  and  finishing  houses,  clothing 
manufacturers,  jobbers,  and  retailers.4  The  selling  house  of 
the  textile  trade  is  of  greatest  importance  to  the  smaller  mills 
which  are  not  near  the  market  and  to  those  mills  which  manu- 
iacture  goods  of  seasonal  design.  Mills  making  staple  fabrics, 
particularly  the  larger  mills,  more  commonly  sell  direct  or  use 
brokers.  The  principal  functions  of  the  selling  house  are 
to  sell  the  cloth  for  the  mills  and  to  finance  them.  This 
last  function  is  more  important  in  the  case  of  Southern  cot- 
ton mills,  which  are  weak  financially  and  removed  from  the 
great  financial  centers,  than  it  is  with  the  mills  in  the  older 
manufacturing  districts.  Aid  is  rendered  through  direct  loans, 
the  endorsement  of  the  mills'  commercial  paper,  or  through 
the  guarantee  of  their  accounts.  In  addition  to  selling  and 
financing,  such  firms  frequently  furnish  the  mills  with  seasonal 
designs  and  patterns,  sometimes  hiring  their  own  representa- 
tives to  go  to  European  markets  to  obtain  the  latest  designs. 
They  are  located  close  to  the  chief  selling  markets,  New  York 
and  Boston,  and  often  have  offices  in  several  other  cities. 
This  enables  them  to  keep  constant  watch  of  the  styles  and^ 
qualities  the  market  demands,  as  well  as  to  sense  the  volume 
of  production  in  various  lines. 

The  actual  selling  is  done  on  a  commission  basis.  The  sell- 
ing house  takes  orders  several  months  before  the  goods  are 
to  be  delivered,  and  orders  the  mill  to  make  them.  Sometimes 
goods  are  manufactured  in  excess  of  these  orders  and  consigned 

4  See  Copeland,  The  Cotton  Manufacturing  Industry  oj  the  United 
States,  Chap.  XI;  and  Chermgton,  The  Wool  Industry,  Chap.  VII. 


156  PRINCIPLES  OF  MARKETING 

to  the  house  for  sale.  The  commission  varies  with  the  work 
done,  ranging  from  one  and  one-half  to  four  per  cent.  When 
selling  is  difficult  and  when  assistance  in  financing  is  rendered, 
or  when  accounts  are  guaranteed,  the  charge  is  greater.  The 
selling  house  usually  has  the  sole  agency  for  each  mill  for 
which  it  sells,  although  a  mill  handling  more  than  one  kind 
of  cloth  sometimes  has  an  agent  for  each.  A  single  house 
usually  handles  the  product  of  several  mills  and  hence  operates 
on  a  large  scale.  This  reduces  the  unit  cost  of  marketing, 
and  enables  the  house  to  have  enough  goods  to  meet  all  normal 
demands  made  by  purchasers. 

Elimination  and  Integration. — Selling  houses  have  been 
a  feature  of  the  cotton  industry  ever  since  its  rise  to  im- 
portance in  the  late  eighteenth  and  early  nineteenth  centuries 
and  were  early  introduced  into  the  wool  and  silk  trades. 
Their  persistence  in  the  textile  trades  after  they  have  been 
eliminated  in  many  others  seems  to  indicate  that  the  function 
they  fulfill  there  is  a  very  real  one.  Most  of  the  small  and 
some  of  the  large  mills  continue  to  sell  in  this  manner.  The 
position  of  the  selling  house  does  not  appear,  however,  to  be 
as  strong  to-day  as  it  has  been  in  the  past.  The  same  ten- 
dencies that  have  brought  about  the  elimination  of  middle- 
men in  other  trades  are  operating  here,  although  as  yet  with 
less  effect.  Here  as  in  some  other  industries  the  continuance 
of  many  small  producers  is  perhaps  the  chief  consideration 
which  has  continued  these  middlemen  as  important  dis- 
tributors^ 

A  close  connection  frequently  exists  between  these  firms 
and  the  mills  for  which  they  sell.  This  connection  may  be 
direct  or  it  may  result  from  having  some  stockholders,  officers, 
or  directors  in  common.5  This  has  led  in  a  number  of  cases 
to  integration,  the  selling  house  becoming  either  the  selling 
company  for  a  mill  or  a  chain  of  mills,  or  the  selling  depart- 
ment of  an  integrated  organization.  Other  large  mills  have 
eliminated  the  selling  house  and  have  organized  their  own 

5  Cherington,  The  Wool  Industry,  Chap.  VII. 


FUNCTIONAL  MIDDLEMEN  157 

selling  house  or  department.  In  other  cases,  elimination  has 
not  gone  so  far — the  selling  house  has  become  a  sales 
agent,  which  operates  under  the  close  supervision  and  direc- 
tion of  the  mill.6 

Commission  men,  often  called  commission  merchants,  are 
also  found  in  the  sale  of  canned  foods — fruit,  vegetables,  fish. 
As  in  other  trades  their  operations  are  often  hard  to  distinguish 
from  those  of  the  broker  and  sales  agent,  but  the  functions 
they  perform  are  more  extensive  than  those  of  either. 

"The  commission  merchant  is  usually  a  general  sales  agent, 
who  handles  the  entire  pack  of  the  canner,  who  very  often  finances 
the  canner,  who  in  many  cases  bills  out  goods  for  him,  and  who 
collects  his  accounts."7 

This  commission  merchant  receives  a  commission  of  about 
5  per  cent,  whereas  ordinary  brokers  receive  2  or  3  per  cent. 
The  extra  commission  is  a  remuneration  for  the  performance 
of  extra  services,  such  as  financing  and  collecting  accounts.8 

(2)  Manufacturer's  Sales  Agent. — Whereas  the  commission 
man  receives  goods  from  the  manufacturer  and  sells  them 
in  his  own  name,  then  collects  the  proceeds  and  after  deduct- 
ing his  expenses  and  his  commission  remits  what  is  left  to 
his  principal,  the  manufacturer's  sales  agent  operates  within 
more  narrow  limits.  The  agent's  authority  as  to  territory, 
prices,  and  terms  is  usually  definitely  limited  by  a  contract 
with  the  manufacturer.9  Sometimes  these  agents  are  paid  a 
salary,  and  are,  therefore,  practically  salesmen,  although  they 
are  more  usually  paid  on  a  commission  basis,  or  on  a  flat  rate 
per  unit  sold.  As  has  just  been  shown,  when  textile  mills 
grow  in  size  and  financial  strength  they  sometimes  change 
from  the  commission  basis  to  the  selling  agent  basis  of  sale,  in 

*Cherington,  op.  cit.,  p.  121. 

7  Report  of  the  Federal  Trade  Commission  on  Canned  Foods:  Gen- 
eral Report  and  Canned  Vegetables  and  Fruits  (May  15,  1918),  p.  18. 

8  Ibid.,  p.  19. 

9  Ibid.,  p.  17. 


158  PRINCIPLES  OF  MARKETING 

order  to  gain  a  more  direct  control  over  the  sale  of  their  out- 
put. This  is  frequently  a  transition  stage  from  complete  de- 
pendence on  commission  houses  to  direct  selling  by  the  mill. 
The  chief  difference  between  the  commission  house  and  the 
manufacturer's  selling  agent  of  the  textile  trade  is,  as  else- 
where, found  in  their  relative  freedom  of  action. 

"Briefly,  the  distinction  between  the  two  is  that  the  agency 
usually  is  financed  by  the  mill  and  performs  the  selling  operations 
on  an  agency  basis  rather  than  as .  a  regular  commission  house. 

The  control  of  selling  operations,  in  other  words,  is  kept  in.  the 
hands  of  the  mill." 10 

Selling  agents  in  the  hardware  and  grocery  field  are  some- 
times known  as  manufacturer's  agents.11  Instead  of  handling 
a  single  kind  of  merchandise  they  commonly  sell  an  assort- 
ment of  goods.  But  they  usually  handle  only  one  kind  of 
each  product  in  their  line,  agreeing  with  each  manufacturer 
to  sell  no  competing  product.  In  the  sale  of  canned  foods 
the  sales  agent  is  known  as  the  "general  sales  agent."  These 
general  sales  agents  usually  sell  all,  or  a  large  part  of  the 
output  of  a  packer.  When  they  handle  the  entire  output 
they  arrange  to  sell  it  in  all  markets,  often  selling  through 
"sub-brokers"  to  whom  they,  not  the  packer,  pay  a  brokerage 
fee.12  In  some  cases  the  general  sales  agent  does  not  handle 
the  entire  output  but  has  a  large  exclusive  territory  in  which 
he  sells. 

The  Federal  Trade  Commission  cites  three  reasons  for  the 
employment  of  general  sales  agents  by  packers.13  First,  it 
may  be  the  quickest  and  most  efficient  way. 

10  Cherington,  op.  cit.,  p.  121. 

UL.  D.  H.  Weld,  op.  cit.,  pp.  574,  580-589. 

13 Report  of  the  Federal  Trade  Commission  on  Canned  Foods:  Gen- 
eral Report  and  Canned  Vegetables  and  Fruits  (1918),  pp.  17-19; 
ibid.,  Canned  Salmon  (1918),  pp.  21-22. 

13  Ibid.,  General  Report  and  Canned  Vegetables  and  Fruits,  p.  18. 


FUNCTIONAL  MIDDLEMEN  159 

"Although  he  usually  has  to  pay  a  general  sales  agent  a  higher 
rate  of  remuneration  [3  to  5  per  cent]  than  the  ordinary  broker, 
he  is  willing  to  bear  the  extra  expense  because  it  obviates  his 
carrying  on  negotiations  with  a  large  number  of  brokers  and 
because  he  has  confidence  in  the  sales  agent's  ability  to  sell  his 
pack  to  advantage."1 

Second,  a  broker  often  advances  money  to  the  packer.  In 
this  case  he  usually  insists  on  marketing  the  entire  pack  of 
the  canner,  and  thus  acts  as  a  general  sales  agent.  Third, 
close  relations,  such  as  were  mentioned  in  the  discussion  of 
the  textile  trade,  sometimes  exist  between  the  selling  house 
and  packing  plants,  and  this  may  cause  their  transactions  to  be 
of  this  nature. 

(3)  The  Broker. — The  term  "broker"  is  usually  applied  to 
that  class  of  middlemen  who  make  it  their  main  business  to 
bring  buyer  and  seller  together.  Representing  either  buyer 
or  seller,  their  only  function  as  pure  brokers  is  to  assist  in  the 
consummation  of  sales,  and  as  a  result  of  their  knowledge 
of  the  trade,  in  the  assembly  of  products.  Such  middlemen 
usually  specialize  in  one  particular  kind  of  product  and  know 
the  market,  the  producers,  and  the  buyers  of  their  field  thor- 
oughly. Their  powers  are  narrow — often  they  have  the  power 
to  sell  or  buy  only  after  confirmation  of  the  transaction  by 
the  firm  for  whom  they  are  operating.  They  are  generally 
paid  a  flat  rate  per  unit  or  carload,  and  because  their  func- 
tions are  few  and  their  expenses  small  their  commissions  are 
not  large.  In  the  sale  of  cotton  fabrics  the  fee  is  commonly 
one-half  of  1  per  cent,  in  the  sale  of  canned  fruits  and  vege- 
tables, 2  or  3  per  cent,  and  in  the  sale  of  canned  salmon,15 
5  to  6%  per  cent. 

Brokers  are  of  great  importance  in  the  sale  of  many  food 

14  Report  of  the  Federal  Trade  Commission,  op.  cit.,  p.  18. 
15 Report  of  the  Federal  Trade  Commission  on  Canned  Foods:  Canned 
Salmon  (Dec.,  1918),  p.  47. 


160  PRINCIPLES  OF  MARKETING 

products,  such  as  groceries,  flour  products,16  canned  goods.17 
The  broker  is  important  in  the  canned  fruit  and  vegetable 
market  because  the  canneries  are  small  and  because  they  are 
usually  located  in  the  producing  areas,  whereas  the  jobbers 
to  whom  the  canned  goods  are  sold  are  far  away  in  the  cen- 
ters of  population  and  ultimate  consumption.  Even  such  large 
manufacturers  as  sugar  refiners  use  brokers.  But  because  of 
their  more  effective  sales  organization,  and  lower  unit  costs 
they  are  particularly  useful  to  the  many  small  manufacturers 
of  limited  lines  found  in  each  of  the  fields  mentioned.  The 
broker  is  also  found  in  the  textile  trades,  where  he  sometimes 
operates  between  the  manufacturer's  selling  agent  and  the 
purchaser,  thus  introducing  another  middleman  operating  on  a 
larger  scale  and  specialized  even  more  highly  than  the  selling 
agent.  Brokers  are  also  important  in  the  sale  of  cotton  grey 
goods,  appearing  between  the  treasurer  of  the  mill  or  its 
selling  agent  and  the  converters.18 

Summary. — The  pure  broker  is  an  independent  agent  who 
merely  brings  buyer  and  seller  together  for  a  single  trans- 
action. Although  he  may  deal  in  the  name  of  his  principal, 
he  ordinarily  accepts  no  responsibility,  and  the  latter's  con- 
firmation of  sale  or  purchase  is  usually  necessary.  Commis- 
sion men  (commission  merchants,  commission  houses,  and 
also  selling  houses  of  the  cotton  cloth  trade)  more  often 
operate  under  contract,  and  deal  in  their  own  name  with 
power  to  buy  and  sell  without  consulting  their  principal.  They 
collect  the  bill  and  deduct  their  own  fees  and  agreed-upon 
expenses  before  remitting.  Very  often  they  finance  the  prin- 

19  Report  of  the  Federal  Trade  Commission  on  Flour  Milling  and 
Jobbing  (1918),  p.  12. 

17  "The  services  of  brokers  are  used  to  some  extent  in  nearly  all 
branches  of  the  food  trade,  though  they  are  particularly  conspicuous  in 
the  case  of  canned  goods." — Report  of  the  Federal  Trade  Commission 
on  the  Wholesale  Marketing  of  Food  (1919),  p.  35. 

18 " With  the  expansion  of  the  industry  and  the  growing  volume  and 
diversification  of  products  such  a  middleman  secures  an  increasingly 
large  place  in  the  market  organization." — Copeland,  op.  cit.,  p.  216. 


FUNCTIONAL  MIDDLEMEN  161 

cipal  through  advances  and  endorsements.  Both  brokers  and 
commission  men  tend  to  specialize  in  the  sale  of  a  limited 
variety  of  goods.  Manufacturer's  selling  agents  differ  from 
commission  men  and  brokers  in  that  they  are  more  closely 
bound  by  contract  to  their  principal,  and  hence  more  closely 
under  his  control.  The  differences  are  largely  in  degree  and 
the  name  a  house  is  known  by  in  the  trade  does  not  always 
indicate  its  exact  service,  but  often  far  from  it.  In  fact  indi- 
vidual selling  houses  commonly  make  different  contracts  with 
each  client,  adapting  the  contract  to  the  needs  of  the 
client. 

(4)  Buying  Middlemen. — Among  the  middlemen  who  rep- 
resent the  purchaser  rather  than  the  seller,  the  broker  is 
probably  the  most  important.  In  fact,  even  when  he  is  the 
direct  representative  of  the  manufacturer  he  can  be  of  great 
service  to  his  client's  customers  through  his  first-hand  knowl- 
edge of  the  market  and  of  sources  of  supply.  Some  brokers, 
particularly  in  the  grocery  trade,  act  as  free  lances,  represent- 
ing a  manufacturer  in  one  sale  and  a  buyer  in  another,  but 
keeping  themselves  unhampered  in  their  general  business  by 
making  no  exclusive  agreements  with  any  manufacturer  or 
buyer.  Even  when  these  brokers  are  the  direct  representa- 
tives of  manufacturers,  buyers  for  wholesale  houses  often 
prefer  to  deal  with  them.  By  dealing  with  brokers  in  each 
field  they  can  most  readily  get  in  contact  with  the  best 
sources  of  supply,  often  at  a  lower  cost  than  would  result 
from  sending  their  own  representatives.  Inasmuch  as  the 
brokers  through  handling  the  product  of  several  manufac- 
turers can  sell  at  a  low  cost  per  unit,  they  thereby  reduce 
the  cost  of  goods  for  their  customers.  Their  operations,  in  the 
large,  thus  assist  in  the  assembling  of  products  by  the  whole- 
saler or  manufacturer. 

Th^buying  of  the  wholesaler  is  also  assisted  by  what  are 
known  as  "purchasing  agents"  in  the  hardware  trade  and  "resi- 
dent buyers"  in  the  dry  goods  business.  These  middlemen 
are  sometimes  the  salaried  representatives  of  the  buying  house, 


162  PRINCIPLES  OF  MARKETING 

sometimes  independent  representatives  working  on  a  commis- 
sion basis.  A  great  many  wholesalers,  importers,  and  large 
retail  establishments  have  such  representatives  in  foreign 
markets  of  importance  as  well  as  in  the  large  domestic  cen- 
ters of  trade. 

The  Merchant-Converter. — Another  interesting  middleman 
is  the  "merchant-converter"  of  the  cotton  trade.19  He  buys 
cotton  goods  in  the  grey,  usually  through  a  broker.  He  then 
has  these  finished,  either  in  his  own  plant  or  on  a  commis- 
sion basis  by  independent  firms,  after  wfTich  he  sells  the 
finished  cloth  to  the  retailer,  wholesaler,  or  cutter-up.  The 
merchant-converter  thus  takes  the  entire  responsibility  for 
styles  and  for  market  conditions,  after  he  has  ordered  or 
purchased  the  cloth  from  the  mill;  he  usually  pays  cash  or 
buys  on  a  short  term  basis,  and  in  case  of  need  gives  credit 
to  the  purchaser.  He  is  a  new  factor  who  has  entered  the 
cotton  trade  in  the  past  few  years  and  is  in  part  responsible 
for  the  gradual  change  taking  place  in  the  functions  performed 
by  the  selling  houses.  In  the  case  of  the  Northern  mills,  the 
financing  activities  of  the  merchant-converter  may  prove  to 
be  influential  in  assisting  the  mills  to  free  themselves,  from 
the  dominance  of  the  older  selling  houses.20  Through  taking 
over  the  responsibility  for  designs  and  assisting  in  financing, 
the  merchant-converter  has  made  possible  a  higher  degree  of 

MSee  Copeland,  op  cit.,  p.  216. 

80  The  whole  market  situation  in  the  cotton  industry  is  so  interesting 
as  to  warrant  a  word  at  this  point.  Cotton  cloth  may,  often  does,  gc 
through  the  following  hands:  cotton  mill,  selling  agent,  broker,  con- 
verter (who  attends  to  finishing  the  grey  cloth),  cutter-up  (clothing 
manufacturers,  and  shirt,  collar,  and  cuff  makers,  etc.),  wholesaler,  and 
retailer.  On  the  other  hand  some  mills  are  highly  integrated  and  sell 
finished  goods  to  the  large  retailers.  Although  many  changes  appear 
to  be  taking  place  the  middleman  is  holding  his  own,  although  in  a 
new  form.  Thus,  while  selling  agents  are  of  diminishing  importance 
the  broker  grows  in  importance  and  the  new  merchant-converter  "is 
coming  most  rapidly  to  the  front."  See  Copeland,  op.  cit.,  pp.  216-219. 


FUNCTIONAL  MIDDLEMEN  163 

specialization  in  the  industry  and  has  thus  made  it  possible 
to  divide  some  of  the  style  and  credit  risks. 

II 

Some    Highly    Specialized    Functional    Agencies. — Two 

other  highly  specialized  factors  in  distribution  which  have 
made  their  appearance  with  the  development  of  modern  mer- 
chandising methods  are  the  advertising  agency  and  the  sajes 
promotion  agency.  The  advertising  agency  in  particular  is 
now  a  firmly  established  institution  in  our  market  life.  In 
addition  to  acting  as  a  space  broker  for  periodicals,  a  good 
advertising  agency  is  able  to  offer  the  service  of  an  organiza- 
tion familiar  with  advertising  methods  and  media,  and  capable 
of  outlining  and  carrying  out  an  effective  advertising  cam- 
paign with  better  results  and  at  a  smaller  cost  than  can  any 
but  the  larger  firms  individually.  Even  the  largest  concerns 
usually  retain  such  an  agency  to  assist  them.  It  is  the 
same  story  of  specialization  and  scale  of  industry.  In  con- 
tact with  the  advertising  world,  confining  its  efforts  to  ad- 
vertising, and  working  for  a  number  of  clients,  such  an  agency 
obtains  certain  advantages  and  economies.  Most  advertising 
agencies  occupy  a  dual  position  as  they  usually  receive  their 
compensation  in  the  form  of  a  commission,  about  15  per  cent 
of  the  amount  paid,  from  the  medium  in  which  advertising 
is  placed,  and  yet  they  represent  and  advise  the  advertiser 
and  often  receive  payment  from  him  for  special  services  ren- 
dered. Many  of  these  agencies  have  achieved  a  remarkable 
success  and  have  numerous  satisfied  clients.21 

The  sales  promotion  agency  is  not  easily  described.  This 
term,  however,  is  coming  to  be  applied  to  individuals  or  firms 
who  come  into  an  organization  from  outside  and  endeavor  to 
improve  the  marketing  scheme.  Sales  promotion  agencies  en- 

21  See  Cherington,  Advertising  as  a  Business  Force,  Chap.  XV,  for  a 
discussion  of  advertising  agencies,  F.  L.  Blanchard,  Essentials  of  Adver- 
tising (1921),  Chap.  XXIV,  and  Tipper,  Hollingworth,  Hotchkiss  and 
Parsons,  Advertising:  Its  Principles  and  Practice,  pp.  408-416. 


164  PRINCIPLES  OF  MARKETING 

deavor  to  find  out  about  the  possible  market,  to  as- 
certain whether  existing  selling  methods  are  best  adapted  to 
the  problems  in  hand,  and  to  render  occasional  assistance  to 
those  in  direct  charge  of  the  selling  branch  of  the  firm.  Such 
service  is  also  frequently  rendered  by  the  advertising  agency. 

Ill 

Middlemen  of  Foreign  Trade:  (i)  The  Commission 
House. — Finally,  three  important  middlemen  found  in  foreign 
trade  will  be  briefly  described:  the  commission  house,  the^ex- 
port  merchant,  and  the  manufacturer's  agent.  As  in  domestic, 
so  in  foreign  trade  some  manufacturers  market  their  product 
directly,  others  market  entirely  through  middlemen  of  one  kind 
or  another,  and  still  others  vary  their  methods  as  between 
different  parts  of  the  world.  In  the  sale  of  the  products  of  ex- 
tractive industries,  particularly  in  that  of  agricultural  products, 
the  middleman  prevails  almost  entirely ;  and  as  in  the  domestic 
sale  of  farm  and  manufactured  products,  so  in  foreign  trade, 
commission  dealers  are  prominent.  But  in  foreign  commerce 
these  commission  merchants — or  "commission  houses,"  as  they 
are  also  called  in  the  United  States,  and  "indent  merchants" 
in  Europe — represent  the  buyer  rather  than  the  seller.  The 
headquarters~of  American  houses  are  located  in  this  country 
where  they  represent  foreigners  who  desire  to  make  purchases 
in  America.  Consequently  they  are  not  sellers  of  American 
merchandise  but  buyers,  and  they  are  paid  for  their  services 
by  the  foreign  buyer  and  not  by  the  American  shipper.  But 
houses  doing  a  commission  business  sometimes  sell  goods  on  a 
commission  basis.  In  fact,  the  larger  houses  have  both  buy- 
ing and  selling  branches,  and  are  represented  in  some  markets 
by  other  middlemen.  They  may,  consequently,  both  buy  and 
sell  for  their  clients  and  may  even  take  title  to  goods  for 
resale.  But  selling  for  clients  or  buying  on  their  own  account 
is  not  the  true  commission  house  function. 

Service  to  American  manufacturer. — It  is  evident  that  the 


FUNCTIONAL  MIDDLEMEN 

commission  house,  when  operating  as  a  pure  commission  house, 
buys  the  domestic  product  of  a  given  firm  only  when  that  prod- 
uct has  been  specifically  ordered  by  a  foreign  purchaser,  or,  in 
case  the  commission  house  is  allowed  to  choose,  only  when  the 
product  is  thought  best  to  meet  his  requirements.  The  house 
depends  upon  the  foreign  buyer  for  its  business  and  is  his  direct 
representative  in  dealing  with  American  producers.  Inasmuch 
as  such  houses  usually  pay  the  domestic  shipper  his  domestic 
terms,  and  themselves  carry  the  credit  risk  of  the  foreign 
buyer  when  that  is  necessary^  it  is  evident  that  they  perform 
"aTery  useful  service  to  the  manufacturer.  In  constant  con- 
tact with  the  foreign  market  they  are  the  source  of  many 
orders  and  a  valuable  medium  for  the  sale  of  domestic  prod- 
ucts. All  of  the  unfamiliar  problems  connected  with  ocean 
transportation,  customs,  tariff,  and  the  like  are  attended  to  by 
the  commission  house.  Very  frequently  producers  do  not 
even  know  the  name  of  the  foreign  house  to  which  they  have 
sold.  For  all  practical  purposes  their  customer  has  been  the 
commission  house. 

Service  to  the  buyer. — These  houses  offer  excellent  service 
to  the  buyer.  They  save  the  trouble  to  which  buyers  would 
otherwise  be  subject  in  ordering  many  small  lots  of  goods  from 
a  number  of  foreign  houses  and  the  further  difficulties  that 
might  arise  in  the  details  of  shipment  and  finance.  For  the 
commission  merchant  takes  the  order,  distributes  it  among 
the  various  producers,  pays  the  individual  shipper  himself, 
and  collects  and  ships  the  goods  in  a  single  order,  thus  re- 
ducing the  cost  of  freight,  insurance,  and  financing.  In  ad^ 
dition  to  their  services  in  buying,  these  houses  frequently 
grant  credit  to  the  foreign  house,  a  thing  which  many  of  the 
producers  whose  products  they  ^>uy  could  not  do.  In  direct 
touch  with  the  producing  market  they  can  give  their  customers 
the  benefit  of  a  thorough  knowledge  of  market  conditions,  pur- 
chase the  latest  styles  and  types,  and  as  intermediaries  be- 
tween buyer  and  seller  afford  a  convenient  agency  for  the 
proper  adjustment  of  disputes  between  them. 


166  PRINCIPLES  OF  MARKETING 

Although  these  merchants  represent  the'  foreign  buyer,  they 
frequently  offer  a  valuable  adjunct  to  American  firms  willing 
to  spend  time  and  money  in  demand  creation  abroad  through 
advertising  and  traveling  salesmen.  Manufacturers  some- 
times send  so-called  "specialty  salesmen"  along  with  the  sales- 
man of  the  commission  house,  or  alone,  to  teach  foreigners 
how  to  use  or  operate  their  product  as, well  as  to  push  its 
sale.  But  the  final  sale  and  all  details  thereof  go  through 
the  commission  merchant.  From  this  it  may  of  course  be  but 
another  step  to  the  entire  elimination  of  the  commission  house. 
It  is  now  estimated,  however,  that  in  normal  times  from  50 
to  70  per  cent  of  our  total  exports  are  sold  through  these 
houses.22 

No  one  commission  house  is  likely  to  prove  best  for  a 
single  manufacturer:  one  will  have  a  good  trade  in  one  part 
of  the  world,  another  in  another.  In  some  parts  of  the  world, 
such  as  Europe  and  South  America,  merchants  prefer  not  to 
deal  through  American  commission  houses,23  whereas  the  trade 
of  the  Far  East,  of  Australia,  and  South  Africa  is  largely 
carried  on  through  them.  In  conclusion  it  should  be  said 
that  large  numbers  of  such  houses,  as  well  as  the  merchants 
to  be  described  next,  are  also  important  importers  of  products 
from  the  countries  in  which  they  sell,  but  as  importers,  they 
are  likely  to  represent  their  foreign  clients  rather  than  the 
American  buyer.  They  often  sell  raw  materials  for  their 
clients  and  buy  finished  products  to  send  to  them. 

(2)  The  Export  Merchant. — Whereas  the  commission  mer- 
chant  is  the  chief  medium  through  which  Amerlcarr^oods 
reach  the  foreign  market,  the  export  merchant  is  the  prm- 
(iipal  agent  through  which  English  and  many  German  prod- 

23  B.  O.  Hough,  Practical  Exporting  (1919),  Chap.  VIII;  E.  W.  Zim- 
merman, Foreign  Trade  and  Shipping  (1917),  p.  112. 

23  This  applies  only  to  the  general  trade  in  manufactured  products. 
Much  of  our  export  of  cotton  and  grains  is  made  to  Europe  through 
specialized  dealers  working  only  in  a  definite,  limited  field,  as  grain,  or 
cotton.  Many  of  these  do  business  as  commission  houses. 


FUNCTIONAL  MIDDLEMEN  167 

ucts  are  exported.  Although,  as  previously  stated,  many 
^export  houses  sometimes  act  as  merchants,  sometimes  as  com- 
mission houses,  and  perhaps,  as  manufacturer's  agents  as 
well,  the  distinguishing  characteristic  of  the  export  merchant 
is  the  fact  that  he  buys  an3  sells  on  his  own  account  Thus, 
"scTfar  as  the  selling  activities  of  the  American  manufacturer 
or  producer  are  concerned,  it  is  the  same  as  though  he  were 
selling  to  a  jobber.  The  export  merchant's  profit  results  from 
the  margin  between  the  cost  of  goods  and  the  expense  of  mar- 
keting them  and  the  price  which  he  receives.  These  merchants 
have  an  especially  important  field  in  undeveloped  markets 
where  they  sometimes  have  a  string  of  warehouses  and  even 
of  retail  stores.  In  England  and  Germany  they  exercise 
a  very  important  function  in  financing  foreign  firms  which 
are  desirous  of  buying  goods  in  the  country  in  which  the 
merchant  is  located.  In  England,  in  fact,  some  of  these 
merchants  have  practically  become  financial  specialists  who 
loan  their  credit  to  foreign  importers  for  the  purchase  of  goods 
in  England.  The  merchant  pays  the  bills  and  takes  in  turn 
the  notes  of  the  foreigner.  He  often  has  no  interest,  directly, 
in  the  goods  bought.  The  German  houses,  on  the  other  hand, 
keep  the  trade  more  closely  in  control  and  themselves  ship 
the  goods  to  the  foreigner,  on  credit,  frequently  making  every 
effort  to  keep  their  clients  from  knowing  the  source  of  their 
product.  As  American  trade  develops,  with  greater  demands 
for  credit,  it  is  likely  that  such  merchants  will  grow  in  im- 
portance and  will  eventually  assist  in  financing  our  trade. 
(3)  Manufacturer's  Agent.  —  It  is  evident  that  neither  the 
nor  the  regulap^cpoTFinerchan)  neces- 


sarily givesan^(?eal  selling  serv^eei7e-4he--^TniTlct  of  par- 
ticular producersr^Jae^one  represents  the  foreign  buyer_  in 
his  purchases  in  this  country  (the  otheFlbuys^nd  sells  onThis 
ownra,ccount]  But^as  our  Toreign  trade  is  passing  from  the 
export  of  staples  alone,  and  manufactured  specialties  are 
developing  which  can  be  successfully  sold  only  when  de- 
mand is  created  for  them,  a  more  difficult  selling  problem 


168  PRINCIPLES  OF  MARKETING 

faces  the  American  manufacturer  who  would  win  out  in  the 
foreign  field.  Consequently  some  manufacturers  are  market- 
ing directly.  But  as  most  manufacturers  cannot  afford  a  sales 
organization  of  their  own  reaching  all  possible  markets,  a  type 
of  export  middleman  has  developed  to  meet  their  needs,  a  mid- 
dleman who  renders  a  real  sales  service  for  the  seller.  These 
middlemen  are  known  as  manufacturer's  agents  or  manufac- 
turer's export  agents. 

The  function  of  such  a  firm  is  to  accept  agencies  for  a  num- 
ber of  manufacturers,  usually  in  some  one  line  —  as  textiles, 
electrical  machinery,  boots  and  shoes,  dry  goods  —  and,  special- 
izing in  the  sale  of  these  commodities,  to  exploit  the  foreign 
market  in  the  interest  of  its  clients'  wares.  Such  an  agent 
will  take  over  not  merely  the  selling  function  but  determine 
credit  ratings,  care  for  shipments,  and  make  proper  financial 
arrangements.  For  its  services  it  charges  a  commission, 
usually  a  high  one,  as  it  performs  many  and  expensive  serv- 
ices. This  is  a  comparatively  new  development  and  sometimes 
such  service  is  sold  by  commission  houses.  This  type  of  mid- 
dleman is  of  growing  importance  and  certainly  offers  a  most 
logical  method  for  disposing  of  the  product  of  manufacturers 
who  must  create  a  demand  for  their  product  but  are  not  able 
or  willing  to  go  to  the  trouble  or  expense  of  doing  it  them- 
selves. In  the  opinion  of  at  least  one  expert  this  is  "the 
coming  method  of  doing  business  through  an  intermediary."  24 

(4)  Cooperation  in  Export  Trade.  —  Somewhat  similar 
to  the  work  of  the  export  agent  are  the  functions  performed 
by  the  combinations  in  export  trade  made  legal  by  the  Webb 
Act  of  1918.  Such  associations  are  founded  by  manufactur- 
ers of  related  lines  for  the  purpose  of 


their  own  selling  agencies.  They  are  likely  to  perform 
functions  similar  to  those  just  described.25 

34  E.  E.  Pratt,  "Determining  Export  Policies"  in  the  Business  Train- 
ing Corporation,  Course  in  Foreign  Trade,  Vol.  3,  pp.  18-20. 

28  See  Eliot  Jones,  The  Trust  Problem  in  the  United  States  (1921), 
Chap.  XVI,  and  W.  F.  Notz  and  R.  S.  Harvey,  American  Foreign  Trade 
(1921),  Chaps.  XI-XVII. 


CHAPTER  X 

DIRECT  MARKETING  OF  MANUFACTURED 
PRODUCTS 


Tendency  Toward  Direct  Marketing. — Previous  chapters 
have  shown  that  the  trend  toward  large  scale  production,  with 
its  resultant  demand  for  large  markets  and  with  keen  competi- 
tion in  those  markets,  has  forced  manufacturers  to  exercise 
a  more  direct  control  over  the  distribution  of  their  merchan- 
dise. There  is  a  distinct  tendency  in  the  manufacturer's 
market  to  reduce  the  number  of  middlemen.  This  tendency 
has  resulted  in  the  main  from  the  pressure  of  competition, 
which  is  frequently  so  great  as  to  compel  the  manufacturer 
to  stimulate  and  control  the  demand  for  his  product.  With 
competition  keen  the  effort  to  control  must  be  continuous  lest 
the  efforts  of  others  divert  the  demand  already  created.  The 
pressure  of  competition  also  forces  manufacturers  to  great 
efforts  in  order  to  gain  the  advantages  of  large  scale  opera- 
tion. These  larger  units  in  turn  have  made  competition  still 
more  keen  and  so  have  become  a  further  incentive  to  direct 
marketing.1  Furthermore,  with  their  organizations  growing  in 

1  Since  1907  a  tendency  toward  integration  of  marketing  functions  has 
been  present  in  the  cotton  manufacturing  industry  which  has  been 
caused  by  "t.hp  ppfipsait.v  fnr  perfecting  the  merchandising  organization^ 
the  desire  nf  tfiP  splli^  house  to  Justify  its  existence,  and  the,  narrnw.r 
ing  of  the  margin  between  the  cost  of  raw  material  and  the  selling 
price  of  the  cloth.  The  fundamental  cause,  the  one  into  which  prac- 
tically all  of  the  others  can  be  resolved,  is  keen  competition  arising  from 
the  increase  in  the  size  of  the  establishments  and  the  growth  of  the 
cotton  manufacturing  industry  in  the  South." — M.  T.  Copeland,  The 
Cotton  Manufacturing  Industry  of  the  United  States,  p.  173. 

169 


170  PRINCIPLES  OF  MARKETING 

size  and  in  financial  power,  and  with  the  problems  of  organiza- 
tion for  production  nearer  solution,  many  manufacturers  find 
themselves  in  a  position  to  devote  their  time  and  their  grow- 
ing financial  resources  to  the  problems  of  market  control.  A 
growing  number  of  firms  are,  consequently,  able  to  launch  into 
the  field  of  distribution  and  to  attempt  the  direct  control 
of  their  market. 

Some  manufacturers  have  found  that  they  can  sell  more 
cheaply  and  more  effectively  if  they  eliminate  the  selling 
house  and  sell  to  jobbers  and  manufacturing  consumers 
through  their  own  sales  organization.  Some  find  that  jobbers 
do  not  create  a  sufficient  demand  for  their  products  and  are 
perhaps  unwilling  to  make  the  attempt.  Particularly  do  those 
who  sell  their  goods  under  brands  which  compete  with  the 
jobber's  private  brands,  and  those  with  new  brands  of  goods 
of  a  kind  for  which  the  jobber  has  already  created  a  large 
demand,  meet  with  this  obstacle.2  Again,  manufacturers  of 
specialties  find  that  the  jobber  is  often,  not  merely  unwilling, 
but  unable  to  make  the  special  selling  effort  that  is  essential 
to  placing  their  products  on  the  market  in  large  volume. 
Other  manufacturers  have  even  gone  so  far  as  to  control  their 
own  retail  organization,  or  in  other  ways  to  sell  directly  to 
consumers. 

OUTLINE  IY.    TENDENCIES  WITH  GOODS  FOR  PERSONAL 
CONSUMPTION 

Kind  of  Merchandise:  Sold  by  Manufacturers  to: 

Unbranded    staples    Jobber 

Jobber's  brand  of  staples    Jobber 

Manufacturer's  brand  of  staples   Jobber 

Manufacturer's  brand  (bought  in  large  volume 

by  individual  retailers)   Retailer 

Specialties    Retailer 

Specialties  (when  individual  sales  are  large) .  . .  .Consumer 

Jobber  Losing  Ground. — Whereas,  in  the  early  years  of  the 
factory  system  the  common  method  of  distributing  staple, 
2  See  pp.  173-177. 


DIRECT  MARKETING  OF  PRODUCTS          171 

factory-made,  consumption  goods  was  through  the  selling 
agent  and  jobber  to  the  retailer,  the  prevailing  method  to-day 
is  through  the  jobber  and  retailer  alone.  And  even  this  sys- 
tem seems  to  be  losing  ground.  For  the  necessity  to  create 
demand,  which  has  developed  with  the  increased  competition 
in  the  sale  of  staple  products,  and  the  growth  of  new  products 
of  the  specialty  type  which  have  to  be  "sold,"  have  led  the 
manufacturer  to  take  over  much,  sometimes  all,  of  the  task 
of  demand  creation.  When  this  is  done  there  is  left  to  the 
jobber  and  retailer  only  the  work  of  physical  distribution, 
together  with  some  phases  of  financing  and  risk-taking.  But 
even  these  fields  are  sometimes  encroached  upon  until  some 
manufacturers  have  entirely  eliminated  the  jobber  and  often 
the  retailer  from  their  marketing  plans.  The  distribution  of 
typewriters,  adding  machines,  cash  registers,  automobiles,  meat 
products,  men's  factory-made  clothing,  and  shoes,  affords  many 
examples  of  one  or  both  of  these  tendencies.3  Each  of  these 
products  is  one  in  which  the  individual  sales  by  the  manu- 
facturer to  retail  dealer  or  final  consumer,  as  the  case  may 
be,  amount  to  a  substantial  sum.  And,  consequently,  the 
manufacturer  can  afford  to  approach  the  buyer  directly,  and 
the  buyer  can  afford  the  time  necessary  to  see  the  salesmen 
and  care  for  the  other  details  of  purchase.  When  the  indi- 
vidual purchases  are  small,  however,  neither  the  manufacturer 
nor  the  buyer  desires  to  deal  directly.  And  it  has  been  shown 
that  it  is  in  such  cases  that  the  middleman  becomes  important. 
The  problems  of  physical  distribution  have  also  been  im- 
portant in  bringing  about  direct  marketing.  Particularly  has 
the  national  distribution  of  perishable  foods  led  the  manu- 

8  "As  an  illustration  of  the  number  of  methods  of  distribution  em- 
ployed by  large  producers,  it  is  a  fact  that  out  of  102  concerns  doing 
national  advertising,  17  sell  to  jobbers,  18  to  retailers,  11  through  agen- 
cies, and  8  to  consumers  direct;  29  sell  to  both  jobbers  and  retailers,  13 
to  retailers  and  through  agencies,  4  to  jobbers,  retailers,  and  through 
agencies,  1  to  both  consumers  and  retailers,  and  1  to  jobbers,  retailers, 
and  consumers." — Printers'  Ink,  Sept.  12,  1912,  quoted  from  Paul  H. 
Nystrom,  The  Economics  oj  Retailing  (1915),  p.  37. 


172  PRINCIPLES  OF  MARKETING 

facturers  of  that  class  of  merchandise  to  market  directly  or 
to  control  physical  distribution  closely.  Such  producers  as 
the  meat  packers,  the  National  Biscuit  Company,  the  Loose- 
Wiles  Company,  and  some  candy  manufacturers  have  devel- 
oped their  own  machinery  for  physical  distribution.4  The 
packers,  for  example,  because  their  product  is  so  perishable 
find  it  necessary  to  study  the  market  closely  and  continuously 
in  order  to  keep  it  properly  supplied.  This,  they  have  found, 
can  be  done  successfully  only  when  they  can  fe&Lihfi  pulse 
of  the  market,  through  their  own  distributing  plants.  The 
breakfast  food  companies,  on  the  other  hand,  have  usually 
been  content  with  a  close  control  over  the  jobber's  service.5 

II 

Jobber  Service  Reviewed. — If,  now,  the  services  of  the 
jobber  to  the  manufacturer  are  summarized  they  will  serve 
as  a  basis  for  ascertaining  those  conditions  which  determine, 
from  the  manufacturer's  point  of  view,  the  desirability  of 
placing  the  jobber  in  the  channel  of  distribution,  as  well  as 
those  conditions  which  determine  whether  his  efforts  shall 
be  supplemented  or  eliminated.6  Very  much  the  same  argu- 
ments apply  in  determining  the  manufacturer's  relation  to 
other  middlemen.  From  the  point  of  view  of  the  manufac- 
turer the  first  and  fundamental  office  of  the  jobber  is  id  sell 
the  manufacturer's  product.  So  essential  is  this  service^  ami 
so  likely  is  the  manufacturer  to  be  critical  of  it,  that  any 
break  between  the  manufacturer  and  the  jobber  is  likely  to 

4  In  1918,  85  per  cent  of  the  grocery  stores  reporting  to  the  Harvard 
Bureau  of  Business  Research  bought  all  of  their  crackers  and  bakery 
goods  (save  those  deteriorating  rapidly  and  so  of  local  production)  from 
manufacturers,   50    per   cent    purchased    all    meats   from    butchers    and 
packers,  and  40  per  cent  bought  candy  only  from  manufacturers.    For 
this  and  other  data  see  Harvard  Bureau  of  Business  Research,  Bui.  No. 
13,  Management  Problems  in  Retail  Grocery  Stores,  pp.  27-30. 

5  Op.  cit.,  p.  28. 

6  This  point  is  discussed  from  the  retailer's  point  of  view  on  pp.  134- 
137,  215. 


DIRECT  MARKETING  OF  PRODUCTS          173 

begin  at  this  point.  Of  very  great  importance,  also,  is  the 
work  of  the  jobber  in  carrying  stocks. /  This  necessitates  buy- 
ing and  storing  in  large  quantities  so  that  the  product  will  be 
constantly  at  hand  to  fill  ordergf  It  involves  the  prompt 
filling  of  orders,  for  the  merchandise  itself  and  for  repairs, 
renewals,  or  supplies.  This  is  a  broad  service  varying  greatly 
in  its  importance  to  the  successful  distribution  of  different 
products. 

In  the  service  just  described  it  is  clear  that  the  jobber 
performs  the  primary  market  functions.  But  his  service  with 
the  auxiliary  functions  is  no  less  important.  He  may  aid 
in  financing  by  buying  stocks,  supplying  a  sales  organiza- 
tion, advancing  funds  to  the  manufacturer,  and  giving  credit  to 
the  retailer.  He  may  help  with  the  risk  function  by  buying 
or  contracting  for  the  manufacturer's  products  and  by  stock- 
ing them,  as  well  as  in  giving  credit  to  retailers.  He  thus 
carries  much  of  the  burden  of  the  ri§k  involved  from  possible 
physical  deterioration,  demand  failure,  and  credit  losses. 

Jobbers  and  Demand  Creation. — The  most  importanLcflUse 
for  the  elimination  of  the  jobber  is  the  intense  competition 
for  sales!  Because  jobbers  either  will  not  or  cannot  give  the 
service — demand  creation ;  price  maintenance ;  prompt  .delivery 
of  products,  parts,  repairs,  renewals,  and  supplies;  storage, 
etc^wEIcB  manufacturers  feel  that  they  must  have  to  en- 
large their  markets  and  retain  them,  the  manufacturers  have 
attempted  to  perform  these  services  themselves.  Jobbers  gen- 
erally handle  a  wide  variety  and  a  large  volume  of  products. 
In  serving  the  retailer  they  endeavor  to  supply  any  commodity 
which  may  be  called  for.  They  handle,  consequently, 
thousands  of  articles  in  the  grocery  and  hardware  trades, 
hundreds  of  articles  in  the  drug,  dry  goods,  musical  instru- 
ment, and  paper  trades,  and  large  numbers  in  many  other 
lines.  The  selling  effort  of  a  jobber  must,  consequently,  be 
divided  among  many  different  kinds  of  articles  and  among 
several  competing  articles  of  the  same  kind.  It  therefore 
follows  that  the  average  commodity  receives  no  special  sell- 


174  PRINCIPLES  OF  MARKETING 

ing  effort  on  the  part  of  the  jobbing  organization.  Such 
sales  as  are  made  are  due  to  a  large  extent  to  the  fact 
that  the  article  is  shown  in  the  catalogue,  that  it  allows  a  good 
margin  to  the  retailers,  or  is  particularly  satisfactory  to  the 
consumer  and  so  helps  to  build  up  the  dealer's  trade. 

This  is  the  condition  which  the  manufacturer  faces,  unless 
some  special  reason  exists  for  the  jobber's  pushing  his  partic- 
ular product.  Such  reasons  may  arise  from  the  fact  that  the 
article  offers  a  wider  margin  of  profit  than  competing  articles; 
or  that  it  is  of  such  quality  and  gives  such  satisfaction  in 
use  that  consumers  demand  it,  and,  consequently,  it  is  easily 
sold;  or  from  the  fact  that  it  bears  the  jobber's  own  brand. 
Again,  the  product  may  be  branded  by  the  manufacturer, 
but  may  be  satisfactory  as  to  margin  and  quality;  or  it  may 
be  a  product  for  the  sale  of  which  the  jobber  is  given  an  ex- 
clusive agency  for  a  particular  territory.  Finally,  it  may  be 
merchandise  for  which  the  manufacturer  through  skillful  sales 
effort  has  created  such  a  demand  that  the  jobber  finds  that  a 
minimum  of  sales  effort  on  his  part  will  achieve  large  results. 

Products  the  Jobber  Sells  Best. — These  facts  have  an  im- 
portant bearing  on  the  kind  of  products  that  can  be  advan- 
tageously sold  through  the  jobber.  They  must  usually  be 
stajDlejDroducts  commonly  demanded  by  consumers,  and  con- 
sequently by_retailers.  They  must  be  products  for  which  it 
is  not  difficult  to  create  a  demand,  or  for  which  the  producer 
has  created  a  demand  Products  which  are  already  demanded 
are  looked  upon  with  *V  j*rpatfpst  fa,vnr  hy_t-h°  jobber.  He  is 
very  generally  indifferent  to  a  new  product,  particularly  if  it 
is  but  a  new  brand  of  an  old  commodity.  He  is  likely  to 
have  in  his  stock  several  of  the  same  kind,  and  so  far  as  he 
is  concerned  there  is  little  need  for  another.  His  interest  can 
be  aroused  only  if  the  new  product  is  easy  to  sell,  or  offers 
a  wider  margin  than  other  products  of  equal  quality  which 
he  is  already  distributing.  Otherwise,  to  take  on  another 
product  simply  ties  up  more  capital  in  stock;  and,  if  he  really 
tries  to  sell  it,  involves  effort  which  may  not  increase  his 


DIRECT  MARKETING  OF  PRODUCTS          175 

total  sales  at  all,  but  merely  divert  demand  from  one  of  his 
products  to  another.  Even  if  the  total  demand  for  this  kind 
of  product  is  increased,  it  may  be  at  the  expense  of  other 
kinds  of  products,  and  in  any  case  the  cost  of  creating  the 
new  demand  may  offset  any  anticipated  profits. 

The  Jobber  and  New  Products. — A  new  product,  conse- 
quently, is  not  usually  well  sold  by  the  jobber.  It  will  take  too 
much  of  his  time  to  give  it  the  kind  of  sales  effort  necessary 
to  create  a  suitable  demand.  This  he  is  unwilling  to  give, 
and,  furthermore,  he  may  be  unable  to  give  it.  He  does  not 
as  a  rule  advertise  individual  products  and  his  sales  force  does 
not  have  the  time  to  devote  to  new  products  without  slighting 
the  many  others  which  it  is  organized  to  sell.  In  addition  to 
this,  the  jobber's  salesmen  may  not  have  the  qualities  neces- 
sary to  sell  the  new  article,  particularly  if  it  is  a  specialty. 
It  follows,  then,  that  if  a  product  has  real  merit,  if  it  is  of 
a  kind  which  is  in  demand,  if  it  allows  a  good  margin  to  the 
jobber  and  the  retailer,  it  will  be  sold  well.  But  if  no  demand 
exists  for  it,  and  it  is  therefore  hard  to  sell,  the  jobber's  efforts 
alone  are  not  likely  to  prove  successful.  In  fact,  the  jobber 
is  likely  to  refuse  to  handle  it  at  all.7 

Jobber  Brands. — The  private  brands  under  which  some 
jobbers  sell  are  also  a  cause  for  difficulty.  For  it  is  natural 
to  assume  that  a  jobber  will  push  his  own  brand  rather  than 
a  similar  product  branded  by  a  manufacturer.  The  reasons 
for  branding  by  the  jobber  were  discussed  in  Chapter  VIII 
and  the  advantages  arising  from  the  general  use  of  brands 
will  be  considered  in  Chapter  XIX.  It  is  simply  neces- 
sary to  point  out  now  that  when  a  jobber  has  a  branded 
product  of  his  own  he  may  well  refuse  to  handle  a  com- 
peting product  branded  by  a  manufacturer.  And  if  he  does,  the 
manufacturer  is  likely  to  be  dissatisfied  with  the  results. 

The  Manufacturer  Who  Does  Not  Brand.— The  manu- 
facturer who  does  not  brand  or  advertise  his  product  and 

7  L.  D.  H.  Weld,  "The  Economics  of  Advertising,"  Printers'  Ink,  Vol. 
104  (July  11,  1918),  p.  101. 


176  PRINCIPLES  OF  MARKETING 

who  sells  to  the  jobber  is  not  in  a  strong  strategic  position. 
This  is  particularly  true  if  his  article  is  easily  duplicated, 
as  is  true  of  most  staples.  Inasmuch  as  his  product  goes 
into  retail  channels  as  the  product  of  the  jobber,  and  not 
under  his  own  name,  such  a  manufacturer,  unless  he  is  par- 
ticularly capable  as  a  producer,  is  likely  to  lose  his  market 
at  any  time  to  another  producer  who  will  sell  to  the  jobber 
at  a  lower  price.  The  jobber's  success  is  not  tied  up  with  the 
success  of  any  particular  manufacturer  whose  products  he 
buys.  He  has,  consequently,  little  interest  in  the  success  of  the 
manufacturer.  From  this  it  follows  that  if  the  individual 
manufacturer  would  increase  and  control  the  market  for  his 
product  he  must  sell  it  himself,  or  else  utilize  some  method  of 
tying  the  interest  of  the  jobber  more  closely  with  the  success 
of  his  own  product.  It  is  for  this  reason  that  manufacturers 
who  depend  entirely  upon  the  jobber  for  a  market  for  their 
product,  commonly  remain  small  and  unknown,  unless  they 
have  peculiar  advantages  in  production.  Their  business,  like- 
wise, is  precarious,  for  their  market  is  a  few  large  jobbers,  even 
a  single  jobber,  and  such  a  market  is  easily  lost.  These  facts 
have  led  many  manufacturers,  even  of  staple  lines,  to  brand 
and  advertise  their  products.  But  many  jobbers  resent  the 
attempts  made  by  the  manufacturers  to  "help"  sell,  and  their 
efforts  to  control  the  marketing  of  their  product.  These  ef- 
forts include,  for  example,  advertising,  sending  out  salesmen 
directly  to  retailers,  and  endeavors  to  control  the  price  policies 
of  the  dealers  involved  after  the  product  has  been  sold 
by  the  manufacturer.  Under  such  conditions  some  manufac- 
turers have  been  forced  to  try  their  own  hand  in  the  market 
or  else  to  succumb  before  those  who  do. 

Summary. — We  may  conclude  from  what  has  gone  before 
\  that  staples,  goods  of  a  kind  for  which   a   demand   among 
consumers  need  not  be  created,  are  the  products  most  advan- 
tageously handled  by  jobbers.     It  has  likewise  been  shown 
f±  that  specialties,  products  for  which  a  consumer  demand  must 
-  be  created,  are  not  likely  to  be  well  sold  by  jobbers.     It  has 


DIRECT  MARKETING  OF  PRODUCTS          177 

been  further  shown  that  individual  manufacturers  of  staple 
products  cannot  expect  the  jobber  to  give  to  the  sale  of 
their  particular  product  the  selling  effort  which  they  desire. 
This  is  particularly  true  when  the  jobber  sells  competing 

»  goods  under  his  own  brand.  These  conditions  lead  to  direct 
sale  by  manufacturers.  Such  direct  selling  is  of  two  kinds: 
one  to  create  a  demand  for  a  new  kind  of  product,  and 

..the  other  to  create  a  demand  for  a  particular  manufac- 
turer's product,  but  of  a  sort  already  demanded.^  But  these 
simply  show  the  two  extremes.  There  are  perhaps  few  staple 
products  for  which  more  demand  may  not  be  created;  and 
there  are  few  specialties  which  are  not  manufactured  by 
more  than  one  producer,  and  which  to  many  consumers  do 
not  assume  the  importance  of  staple  commodities.  The  aver- 
age manufacturer  is  interested,  consequently,  both  in  creating 
a  larger  demand  for  his  own  product,  and  in  getting  as  much 
as  possible  of  the  existing  demand  and  of  any  newly  created 
demand  for  that  particular  kind  of  product. 

Ill 

Cost  the  Determining  Factor. — The  interest  of  the  manu- 
facturer in  enlarging,  retaining,  and  controlling  his  market 
would  naturally  lead  him  to  sell  his  product  directly  to  the 
retailer,  if  not  to  the  final  consumer.  But  the  element  of  cost 
may  deter  him  to  such  an  extent  that  he  can  simply  supple- 
ment the  efforts  of  the  jobber  in  some  way.  So  much  is  heard 
of  the  "middleman's  profit"  that  one  is  likely  to  be  led  astray 
on  this  point  and  to  feel  that  great  economies  result  from  les- 
sening the  number  of  independent  agencies  in  the  marketing 
chain.8  There  is  reason  to  believe,  however,  that  the  mid- 
dleman's profit  is  not  usually  large.9  It  is  probably  no  greater 

8  At  least  one  careful  investigator  feels  that  often  the  cost  has  been 
increased  as  a  result  of  the  elimination  of  middlemen.  See  L.  D.  H. 
Weld,  "Marketing  Agencies  between  Manufacturer  and  Jobber,"  Quar- 
terly Journal  of  Economics,  Vol.  XXXI  (Aug.,  1917),  pp.  571-573. 

"See  pp.  288,  511-519. 


178  PRINCIPLES  OF  MARKETING 

than  the  additional  profit  the  manufacturer  would  feel  that 
he  must  make  to  cover  the  additional  investment,  trouble,  and 
cost  which  he  must  bear  if  he  performed  his  own  sales  ac- 
tivities. It  is  expensive  to  run  an  extensive  sales  organiza- 
tion; and  a  large  amount  of  capital  must  be  supplied  by  the 
manufacturer  who  markets  around  the  middleman,  for  he  must 
duplicate  the  middleman's  machinery  and  is  likely  to  have  a 
smaller  volume  of  business  in  a  given  territory  than  has  the 
middleman  with  his  wider  range  of  goods.  He  is  also  likely 
to  have  difficult  problems  oi  administrative  control.  The 
net  result,  therefore,  may  well  be  a  higher  unit  cost  of  sell- 
ing. Even  though  he  might  consider  his  sales  organization 
as  supplemental  to  his  producing  activities,  no  wise  business 
man  will  invest  willingly  in  a  sales  organization  without 
the  expectation  of  receiving  his  usual  profit  from  the  increased 
investment.  It  takes  so  much  capital  to  start  such  a  project 
— the  costs  of  operation  are  so  great,  the  risks  to  be  borne  so 
many,  and  the  difficulties  to  be  met  so  numerous — that  many 
manufacturers  hesitate  to  undertake  the  selling  of  their  own 
product  even  when  they  are  dissatisfied  with  existing  agencies. 
Other  manufacturers  have  failed  in  making  the  attempt;  some 
who  have  made  the  venture  now  wonder  if  they  have  not 
made  a  mistake;  and  some  have  already  returned  to  the 
jobber.10 

10  "Out  of  139  manufacturers  who  stated  whether  they  had  changed 
their  selling  methods  during  recent  years,  twenty-three  said  they 'had 
changed  from  selling  through  jobbers  to  selling  direct  to  retailers,  and 
fourteen  said  they  had  changed  from  direct  sale  to  selling  through 
jobbers.  The  number  who  had  gone  back  to  jobbers  is  rather  large  as 
compared  with  the  number  who  had  forsaken  them,  but  this  does  not 
affect  the  general  truth  that  advertising  tends  to  lead  to  more  direct 
sale. 

"Most  of  those  who  had  gone  back  to  jobbers  had  expected  to  sell 
through  this  channel  in  the  first  place,  but  when  they  put  their  branded 
goods  on  the  market,  jobbers  had  refused  to  handle  them,  and  it  was 
therefore  necessary  for  the  manufacturers  to  go  direct  to  retailers  in 
order  to  build  up  their  distribution.  After  an  effective  demand  had 


DIRECT  MARKETING  OF  PRODUCTS          179 

An  Illustration. — To  make  this  aspect  of  the  problem  clear, 
let  us  contrast  the  jobber  with  the  manufacturer  of,  say,  a 
grocery  product.11  The  grocery  jobber  handles  most  of  the 
commodities  the  ordinary  grocer  wishes  to  carry,  and  an  order 
usually  covers  a  large  number  of  products  totaling  a  respect- 
able sum,  so  that  the  expense  of  the  salesman's  call,  the 
determination  of  the  credit  risk,  delivery,  and  the  other  ex- 
penses connected  with  the  sale  are  spread  thinly  on  each  prod- 
uct sold.  The  salesman  of  the  manufacturer  of  any  one  of 
these  products  will  probably  not  sell  many  more  items  of  his 
product  over  a  period  of  time  than  will  the  jobber's  salesman. 
But  the  expense  of  the  manufacturer's  salesman's  call  and  all 
other  expense  connected  with  the  sale  must  be  borne  by  the 
single  article. 

It  is  obvious  that  much  of  the  reasoning  which  has  just 
been  used  does  not  apply  where  the  facts  differ.    They  wouk 
differ,  for  example,  (1)  when  a  single  line  of  goods — such  a 
shoes,  men's  clothing,  and  meat — is  the  main  product  sold  b 
the  retailer  who  buys  them;  or  (2)  in  cases  where  the  value  o 
a  single  purchase  is  great  enough  to  warrant  the  buyer 
seeing  the  special  salesman  of  that  particular  product — as  wit 
typewriters,  cash  registers,  adding  machines,  automobiles,  etc 
or  (3)  when  the  manufacturer  makes  or  distributes  so  wid 
a  variety  of  products  that  his  line  is  comparable  to  that  o 
the  jobber.    This  was  the  case  with  the  grocery  business  o 
Armour  and  Company  before  they  divided  their  grocery  busi 
ness  after  the  "consent  decree"  of  1920.12    In  fact,  there  i 
reason   to   believe   that  the   packers'   costs   for   distributin 

been  established,  their  goods  were  then  put  through  the  jobbers,  who 
were  glad  enough  to  handle  them."— L.  D.  H.  Weld,  "The  Economics 
of  Advertising,"  Printers'  Ink,  Vol.  104  (July  11,  1918),  p.  101. 

"This  is  a  rather  extreme  illustration  to  bring  out  the  point,  for  in 
but  few  lines  do  jobbers  handle  so  many  products  and  on  so  small  a 
margin. 

"Even  with  groceries  eliminated  this  continues  to  be  true  of  the 
larger  packers  because  of  the  wide  range  of  merchandise  they  sell. 


180  PRINCIPLES  OF  MARKETING 

groceries  were  less  than  the  costs  of  the  wholesale  grocers.13 
But  it  is  only  when  the  manufacturer  handles  a  "line"  of 
groceries,  such  as  canned  goods,  pickles,  cookies  and  crackers, 
that  he  can  compete  with  the  grocery  jobbers  on  a  cost  basis. 
In  fact  but  few  manufacturers  even  of  a  "line"  of  grocery 
products  have  thus  far  attempted  direct  sale  to  retailers. 

Manufacturers  Must  Duplicate  Service  of  Jobber. — The 
jobber  is  in  close  contact  with  his  trade,  and  makes  frequent 
sales  calls  so  as  to  get  orders  whenever  the  merchant  has 
need;14  his  warehouse  is  near  at  hand  so  that  deliveries  can 
be  made  on  short  notice  and  economically.  He  buys  in  large 
quantities  and  breaks  up  his  large  purchases  near  the  retail 
market,  thereby  saving  transportation  costs.  In  close  touch 
with  his  customers  he  can  establish  a  personal  clientele  and 
watch  credits  and  collections  with  great  care.  The  manufac- 
turer who  would  market  directly  to  retailers  or  consumers 
must  perform  this  work  or  labor  at  a  great  disadvantage.  In 
order  to  meet  this  necessity  the  manufacturer  who  does  not 
use  jobbers  commonly  establishes  branch  houses,15  such  as 
those  found  in  the  sale  of  canned  foods,  meats,  and  meat  by- 
products, National  biscuits,  Heinz  pickles,  farm  implements, 

13  See  Report  of  the  Federal  Trade  Commission  on  the  Meat  Packing 
Industry,  Part  IV  (1919),  pp.  50-52. 

""Of  all  the  wholesale  grocers  selling  to  local  trade,  9  per  cent  called 
on  their  customers  daily,  9  per  cent  three  times  a  week,  16  per  cent 
twice  a  week,  60  per  cent  once  a  week,  and  the  remainder  once  in  two 
weeks.  .  .  . 

"Among  the  wholesale  grocers  selling  to  customers  within  25-300 
miles,  52  per  cent  called  on  these  customers  in  the  outside  districts 
once  a  week,  42  per  cent  once  in  two  weeks,  and  the  remainder  once  a 
month." — Harvard  University,  Bureau  of  Business  Research,  Bui.  No. 
14,  Methods  of  Paying  Salesmen  and  Operating  Expenses  in  the  Whole- 
sale Grocery  Business  in  1918,  p.  19. 

15  "National  jobbers,"  however,  labor  under  much  the  same  difficulties 
and  have  also  been  forced  to  establish  branches.  See  E.  C.  Simmons, 
"A  Half  Century  in  Hardware,"  Iron  Age.  Vol.  77  (Jan.  4,  1906).  pp. 
145-148. 


DIRECT  MARKETING  OF  PRODUCTS          181 

automobiles,  typewriters.  In  other  words,  the  manufacturer 
must  practically  duplicate  the  jobbing  service  in  the  perform- 
ance of  all  functions.  There  are,  furthermore,  disadvantages 
which  are  not  felt  by  the  jobber.  For  the  manufacturer 
must  have  hired  employees  in  charge  of  his  branches  and  the 
sales  forces  are  likewise  removed  from  immediate  supervision. 
This  necessitates  the  introduction  of  branch  accounting  and 
supervision,  with  the  attendant  costs  and  the  loss  in  effective- 
ness which  the  use  of  salaried  supervision  of  distant  business 
involves. 

Advertising  and  Direct  Marketing. — One  of  the  first  steps 
taken  by  a  manufacturer  who  desires  to  control  his  market 
is  likely  to  be  an  attempt  to  enlarge  demand  through  ad- 
vertising.16 Then  in  order  to  follow  up  the  advertising  and 
make  certain  of  results  he  is  likely  to  consider  it  necessary 
to  take  over  other  jobbing  functions.  He  may  even  find  it 
desirable  to  take  over  the  physical  distribution  of  the  mer- 
chandise. The  natural  tendency,  once  the  movement  is  started, 
may  well  lead  to  the  entire  elimination  of  the  jobber's  ser- 
vices. Some  manufacturers  feel  that  they  fare  better  when 
their  own  trained  men  sell  and  distribute  their  products. 
They  discover  that  many  retailers,  particularly  the  larger  ones, 
prefer  to  buy  "over  the  head"  of  the  jobber,  that  jobbers  are 
not  always  willing  to  keep  large  enough  stocks  in  storage 
to  supply  the  demand,  and,  finally,  that  direct  selling  gives 
a  control  over  quality  of  service,  general  policy,  and  prices 
that  it  is  difficult  to  attain  through  the  jobber. 

The  very  fact  that  the  manufacturer  is  creating  a  demand 
for  his  product,  and  is  endeavoring  to  control  the  activities 
of  the  jobber  who  distributes  it,  may  arouse  the  antagonism 
of  the  jobbers  to  such  a  degree  that  the  manufacturer  will  feel 
forced  to  take  these  further  steps.  On  the  other  hand,  manu- 

16  Even  at  this  point  the  manufacturer  must  decide  whether  he  will 
"go  around"  the  functional  middlemen  of  the  advertising  field,  the  ad- 
vertising agency,  or  whether  he  will  use  the  services  of  one  middleman 
in  eliminating  those  of  another. 


182  PRINCIPLES  OF  MARKETING 

facturers  are  sometimes  compelled  to  create  a  demand  for  their 
product  before  the  jobber  can  be  induced  to  stock  it,  because 
the  latter  does  not  feel  that  it  is  worth  his  while  to  sell  it 
with  his  own  sales  organization.17 

It  is  not  clear  that  the  cost  of  distribution  is  lowered  when 
middlemen  are  eliminated.18  One  of  the  greatest  costs  of 
the  distributive  organization  of  the  manufacturer  who  sells 
to  retailers  and  endeavors  to  create  a  consumer  demand  for 
his  product,  is  the  national  advertising  bill,  an  expense  that 
is  largely  paid  by  the  manufacturer  himself.  It  is  not  as 
yet  an  important  cost  to  wholesale  middlemen.19  The  cost 
of  direct  demand  creation  whether  by  advertising  or  sales- 
men is  generally  a  very  heavy  charge  and  one  which  must 
be  financed  by  the  manufacturer  if  he  sells  his  product  him- 
self. On  the  other  hand,  it  may  well  be  true  that  the  sales 
department  of  a  large  firm,  especially  of  one  handling  a  large 
"family"  of  related  products,  can  operate  as  economically 
as  any  jobbing  house  selling  the  same  articles,  and  the  results 
to  the  manufacturer  may  prove  to  be  far  superior.20 

Conclusion. — Dissatisfaction  with  prevailing  methods  and 
channels  of  distribution  is  at  the  base  of  most  attempts  to 
go  around  middlemen.  The  reasons  for  this  dissatisfaction 
have  been  reviewed.  And  it  has  been  further  shown  that 
many  manufacturers  have  their  production  problems  suf- 
ficiently routinized  to  devote  their  individual  time  and  atten- 
tion to  marketing.  Finally,  a  growing  number  of  manufac- 

17  See  L.  D.  H.  Weld,  "The  Economics  of  Advertising,"  Printers'  Ink, 
Vol.  104  (July  11,  1918),  p.  101. 

18  See  Chap.  XIV. 

18  Some  "national"  jobbers,  however,  brand  and  advertise  their  prod- 
ucts on  a  national  scale,  and  some  so-called  manufacturers  may  have 
their  products  made  in  large  part  by  other  manufacturers,  but  brand 
them.  Ingersoll  watches  were  originally  made  in  this  way. 

20  See  E.  B.  Merritt,  "How  Armour  &  Co.  are  Solving  their  Vast  Sell- 
ing Problem,"  in  Printers'  Ink,  Jan.  23,  1913,  pp.  3-10;  and  "Reasons 
back  of  Armour's  Selling  Policies,"  in  Printers'  Ink,  Feb.  27,  1913,  pp. 
3-8. 


DIRECT  MARKETING  OF  PRODUCTS          183 

turers  have  reached  a  position  of  financial  power,  and  in- 
creased financial  resources  tend  toward  direct  marketing. 
This  is  for  two  reasons :  first,  the  manufacturer  is  thereby 
relieved  from  dependence  upon  the  middlemen  for  financial  as- 
sistance, direct  and  indirect.21  Second,  the_initial  costs  of 
initiating  the  direct  marketing  of  a  product— particularly  one 
which  is  sold  in  small  quantities  to  final  consumers — are  likely 
to  be  so  great  that  only  a  manufacturer  with  large  financial 
resources  can  undertake  it.  This  is  true  in  large  measure 
even  when  manufacturers  sell  to  retailers,  and  do  not  try 
to  retail  their  product.  It  is  especially  true  when  the  manu- 
facturer's product  is  but  a  small  part  of  the  dealer's  stock 
in  trade. 

Nevertheless,  even  though  marketing  ability  and  financial 
resources  are  at  hand,  and  even  though  a  manufacturer  may 
be  dissatisfied  with  existing  means  of  distribution,  but  few_ 
manufacturers  completely  supplant  existing  agencies  with 
their  own.  Most  of  them  find  that  to  market  their  product 
directly  would  be  so  costly  that  they  could  not  compete  on 
a  price  basis  with  those  who  utilize  existing  agencies.  Seldom 
indeed  does  the  manufacturer  eliminate  the  retail  dealer.  He 
may  do  his  own  jobbing.  But  more  commonly  he  supplements 
the  dealer's  efforts  and  cooperates  with  both  jobber  and  re- 
tailer. 

As  the  basic  functions  of  marketing  can  be  broadly  divided 
between  those  which  bring  about  an  exchange  of  ownership, 
those  concerned  with  physical  distribution,  and  those  which  are 
auxiliary  to  exchange  and  physical  supply,  so  manufacturers 
frequently  undertake  for  themselves  some  aspects  of  their  mar- 
keting problem  and  leave  the  others  to  established  middlemen. 
When  a  manufacturer  carries  on  an  advertising  campaign  for 
his  product,  or  sends  his  own  salesmen  to  push  it  among  the 
trade,  he  often  continues  to  have  it  delivered  through  jobbers 
and  retailers,  and  even  through  selling  houses  to  the  jobber. 

21  See  pp.  342-345. 


184  PRINCIPLES  OF  MARKETING 

On  the  other  hand,  when  the  jobber  or  commission  firm  takes 
orders  for  products  which  are  delivered  by  the  manufacturer, 
the  latter  is  caring  for  the  physical  distribution  of  his  product, 
the  middleman  for  demand  creation.  When  there  is  a  high 
degree  of  cooperation  between  manufacturer,  jobber,  and  re- 
tailer, each  may  perform  part  of  the  work  of  demand  crea- 
tion, as  well  as  part  of  the  work  of  physical  distribution, 
financing,  and  risk-taking.  The  manufacturer  may  utilize 
national  advertising  and  salesmen  to  create  demand;  the  job- 
ber, in  addition,  will  push  the  article  through  his  sales  or- 
ganization; and  the  retailer  will  utilize  local  advertising  and 
his  store  organization.  Carloads  will  be  sent  from  the  pro- 
ducer's warehouse  to  retailers  on  orders  which  the  jobber 
takes;  the  jobber  will  store  enough  of  the  product  to  supply 
small  shipments  and  rush  orders;  and  the  retailer  in  each 
case  will  attend  to  the  final  sale  and  delivery  of  the  product 
to  the  ultimate  consumer.  Middlemen  may  advance  cash  to 
the  manufacturer,  pay  cash  on  delivery,  or  receive  credit,  and 
other  means  of  dividing  the  work  of  financing  and  risking 
may  prevail  as  the  product  goes  on  its  way. 


CHAPTER  XI 
RETAIL  DISTRIBUTION 

The  Retail  Service.  —  The  service  of  retailing  is  to  supply 
the  individual  consumer  with  the  goods  he  desires  for  personal 
consumption.  To  do  this  the  retailer  must  anticipate  _the 
needs  of  his  trade,  assemble  the  goods  desired,  store  them, 
TTnd  Have  tKenTready  to  be  delivered  from  convenient  points. 
these  operations,  bear  the  risks  involved,  and 


create  a  demand  for  his  services.  The  retailer  is  the  truest 
type  of  "areal"  middleman,  for  he  performs  all  of  the  mar- 
keting functions.1 

To  retail  meant,  originally,  to  cut  again,  to  divide  into 
pieces;  and  this  definition  suggests  an  important  economic 
justification  for  retailing.  For  most  retailers  buy  in  quantities 
the  products  which  ttgy  anticipate  the  final  consumer  will 
demand,  and  divide  these  large  quantities  into  the  smaller 
amounts  the  consumer  is  willing  to  purchase.  It  is  usually 
too  expensive  and  too  troublesome  for  the  manufacturer  to 
sell  "direct,"  or  for  the  consumer  to  buy  Direct,"  for  personal 
consumption.  The  individual  exchanges  are  too  small.  By 
assembling  at  convenient  points,  from  numerous  sources,  the 
various  kinds  of  products  which  consumers  demand,  the  re- 
tailer enables  the  consumer  to  purchase  a  variety  of  goods  in 
small  amount,  on  short  notice,  and  with  a  minimum  of  trouble. 
Incidental  to  these  services,  but  of  growing  importance  with 
the  increasing  variety  of  consumer  desires  and  the  decreasing 
storage  space  in  the  average  home,  is  the  fact  that  the  retailer 
finances  the  purchase  and  arranges  for  the  transportation 
of  goods  to  points  near  the  consumer  and  stores  them  there 

1  A.  W.  Shaw,  Some  Problems  in  Market  Distribution,  pp.  76  ff. 

185 


186  PRINCIPLES  OF  MARKETING 

until  they  are  wanted.  He  also  bears  the  risk  of  style  changes 
and  of  physical  deterioration,  and  extends  credit  to  the  con- 
sumer. 


Types  of  Retail  Establishment. — There  are  five  outstand- 
ing types  of  retail  establishment  in  America.  In  the  order  of 
their  rise  to  importance  they  are:  (1)  the  general  store, 
sometimes  called  the  country  general  store,  because  of  its 
prevalence  in  rural  communities,  (2)  the  "unit"  store,  (3)  the 
department  store,  (4)  the  mail  order  house,  and  (5)  the  chain 
store.  The  trading  post  of  early  American  history  has  been 
entirely  superseded  in  the  United  States,  although  it  survives 
in  the  trading  post  of  the  trading  companies  of  the  far 
Canadian  north.  Cooperative  stores  cannot  be  considered  im- 
portant in  this  country,  although  they  grew  in  importance 
during  the  World  War.2 

(i).The  Country  General  Store.3 — Of  mpdern  retail  stores 
the  country  general  store  was  the  first  to  develop,  and,  al- 
though now  of  decreasing  importance,  it  is  still  found  at  vil- 
lage cross  roads,  in  small  country  towns,  and  in  larger  towns 
remote  from  city  stores. 

"The  general  store  is  perhaps  the  most  typical  American  de- 
velopment in  merchandising  institutions,  since  very  few  like  it 
are  to  be  found  anywhere  else  in  the  world.  The  old-time  general 
store  distributed  dry-goods,  hardware,  groceries,  drugs,  and  even 
liquors.  It  was  frequently  the  location  of  the  post-office,  and 
served  as  the  village  social  center  for  the  men.  The  old  box 
stove,  the  rickety  chair  or  two,  the  near-by  barrels,  and  the  saw- 
dust spit-box,  were  the  almost  universal  furnishings  that  equipped 
it  for  its  social  services.  Here  politics,  religion,  and  neighbors 
were  discussed.  It  may  not  be  too  much  to  say  that  here  the 
tariff  question,  the  government  bank,  internal  improvements,  for- 
eign policies,  and  other  important  government  matters  were  ulti- 

aThe  cooperative  movement  is  discussed  in  Chap.  XIII. 
3  The  buying  of  local  produce  by  the  country  general  store  was  dis- 
cussed briefly  on  pp.  49-50. 


RETAIL  DISTRIBUTION  187 

mately  settled.  .  .  .  With  all  its  inefficiency,  its  wasteful  methods, 
and  its  shortcomings,  as  a  retail  establishment,  it  must  be  said 
that  it  successfully  served  its  day  as  probably  no  other  type  of 
institution  could."  * 

But  as  the  standards  of  consumption  improved  and  became 
more  various,  and  as  new  processes  of  production  turned  out 
larger  and  larger  varieties  of  products,  as  better  roads,  sub- 
urban trains,  and  superior  communication  facilities  appeared, 
specialization  developed  in  the  retail  business  and  the  unit 
store  emerged,  a  store  which  specialized  in  the  sale  of  par- 
ticular classes  of  goods. 

(2)  .  The  Unit  Store.5 — The  unit  store  is  to-day  the  prevail- 

4  Paul  H.  Nystrom,  Economics  of  Retailing  (2d  ed.,  1919),  pp.  23-24. 

8  This  is  a  term  used  by  Professor  M.  T.  Copeland  in  a  paper  ''The 
Scope  and  Content  of  a  Course  in  Marketing,"  read  before  the  Asso- 
ciation of  Collegiate  Schools  of  Business  in  May,  1920,  and  printed  in 
the  Journal  of  Political  Economy,  Vol.  XXVIII,  No.  5  (May,  1920). 
He  states:  "A  unit  store  is  a  store  without  an  elaborate  departmental 
organization  that  is  owned  and  managed  as  an  independent  unit  for  the 
sale  of  goods  through  personal  salesmanship.  Unit  stores  are  used  most 
extensively  for  the  distribution  of  merchandise,  such  as  groceries,  hard- 
ware, agricultural  implements,  shoes,  men's  clothing  and  furnishings, 
jewelry,  cigars  and  tobacco,  and  drugs. 

"Unit  stores  furnish  the  most  numerous  outlets  for  many  kinds  of 
merchandise.  They  provide  the  only  means  whereby  large  numbers  of 
consumers  can  be  reached  regularly.  They  are  adaptable  to  the  service 
requirements  of  their  patrons.  Frequently  the  proprietor  of  a  unit 
store  has  built  up  a  strong  personal  clientele.  The  market  for  mer- 
chandise distributed  through  unit  stores  is  not  dominated  by  a  few 
large  powerful  buyers. 

"A  manufacturer  who  elects  to  distribute  his  product  through  unit 
stores,  however,  encounters  difficulty  in  inducing  a  large  number  of 
individual  retailers  to  handle  his  product  effectively.  While  there  are 
many  notable  exceptions,  nevertheless  a  substantial  number  of  unit 
stores  are  not  operated  efficiently.  The  selection  of  this  type  of  store 
as  the  marketing  agency,  therefore,  presents  a  series  of  difficult,  com- 
plex problems." 

A  more  minute  discussion  than  it  is  possible  to  give  here  is  found 
in  that  article,  pp.  381-387.  The  whole  article  is  reprinted  in  M.  T. 
Copeland's  Marketing  Problems  (1920),  pp.  1-23. 


188  PRINCIPLES  OF  MARKETING 

ing  means  of  retail  distribution  in  both  town  and  city,  and, 
although  it  is  familiar  to  all,  later  discussion  will  be  clarified 
if  its  main  characteristics  are  briefly  enumerated  at  this  point. 
Such  a  store  is  owned  and  operated  as  an  independent  unit. 
It  handles  a  restricted  line  of  products — meat,  groceries,  drugs, 
hardware,  jewelry,  coal,  candy,  dry  goods,  millinery,  athletic 
goods,  confections — and  consequently  need  not  be  elaborately 
departmentized.  The  reasons  for  the  strength  of  the  unit 
store  in  its  competition  with  department  stores,  chain  stores, 
and  with  mail  order  houses  have  been  described  as  follows:  6 
(a)  convenience  to  the  customer,  as  illustrated  by  the  "cor- 
ner" grocery  store;  (b)  complete  stocks,  which  can  be  kept 
more  complete  than  those  of  the  average  department  store  or 
mail  order  house.  This  is  particularly  true  of  the  larger  city 
specialty  stores;  but  it  is  also  true  of  rural  or  suburban  stores, 
since  they  are  usually  competing  with  small  department  stores 
or  country  general  stores.  Further  advantages  are:  (c)  the 
personal  service  of  the  proprietor  to  the  public,  which  fre- 
quently results  in  his  building  a  strong  personal  clientele, 
over  whose  purchases  he  possesses  a  large  influence;  (d)  the 
possibility  of  rapid  turnovers,  which  on  the  average,  however, 
appears  not  to  have  been  realized;  and  (e)  low  expenses.  Re- 
cent investigations  from  a  number  of  sources  seem  to  indicate 
that  the  selling  expenses  of  department  stores  at  least  are 
higher  than  the  best,  perhaps  than  the  average,  of  competing 
specialty  stores.7 

The  same  source  points  out  various  disadvantages  of  the 
unit  store.  First  of  these  is  (a)  the  limited  trade  area  from 
which  the  neighborhood  store  in  particular  draws,  and  which 
precludes  the  possibility  of  a  large  business,  (b)  Newspaper 

'Ralph  Starr  Butler,  Marketing  Methods,  pp.  62-69.  Butler  calls 
them  "specialty"  stores,  but  this  term  usually  has  a  narrower  meaning, 
referring  to  a  type  of  urban  unit  store  which  utilizes  aggressive  sales 
efforts  or  specializes  in  catering  to  a  more  or  less  exclusive  clientele. 

7  See,  for  example,  Nystrom,  op.  cit.,  pp.  263-266.  This  point  will  be 
discussed  again  in  Chap.  XII. 


RETAIL  DISTRIBUTION  189 

advertising  cannot  be  used  to  the  best  advantage,  for  the  cost 
of  effective  advertising  in  view  of  the  limited  patronage — 
particularly  of  the  neighborhood  store — is  often  far  too  great 
in  relation  to  sales  to  warrant  the  expenditure.  This  is  par- 
ticularly true  of  advertising  in  large  newspapers  which  have 
a  much  wider  circulation  than  the  trading  area  of  the  small 
store,  (c)  To  the  person  desiring  to  buy  many  articles  the 
limited  line  carried  by  the  unit  store  is  a  disadvantage  as 
compared  with  the  many  lines  of  the  department  store,  or 
even  with  a  varied  line  of  goods  under  one  roof  or  in  one  cata- 
logue of  the  mail  order  house.8  (d)  Certain  buying  weak- 
nesses also  exist;  many  manufacturers  give  greater  quantity 
discounts  to  mail  order,  chain,  and  department  stores;  and 
through  their  extensive  buying  organizations  larger  establish- 
ments are  also  better  able  to  keep  in  close  touch  with  the 
market,  and  to  gain  any  advantages  which  superior  market 
knowledge  may  yield,  (e)  Unit  stores  are  liable  to  be  poorly 
managed.  Although  this  is  not  an  inherent  weakness  it  is 
very  common.  *  In  fact,  it  is  perhaps  true  that  the  difference 
between  the  small  store  and  its  large  competitor  is  due  funda- 
mentally to  the  superior  managing  ability  of  the  proprietor 
who  started  the  latter.  If  the  owner  of  the  unit  store  were  a 
better  manager,  he  would  very  likely  branch  out  into  larger 
lines  of  merchandising.  Recent  investigation  shows,  never- 
theless, that  many  small  unit  stores  are  operated  with  remark- 
able efficiency.9 
The  unit  store  is  the  "regular"  dealer  at  retail.  And  the 

8  Many  housewives  who  are  within  shopping  distance  of  good  stores 
of  the  specialty  type  prefer  to  order  many  of  their  goods  from  mail 
order  houses  because  less  time  is  necessary  to  select  the  goods  from  the 
catalogue  and  make  out  the  order  than  would  be  taken  in  going  from 
store  to  store  looking  over  the  stocks  of  each  kind  of  article  bought. 
A  similar  advantage  is  offered  by  department  stores. 

*See  the  report  of  the  Northwestern  University  Bureau  of  Business 
Research  on  the  retail  clothing  industry — Costs,  Merchandising  Prac- 
tices, Advertising  and  Sales  in  the  Retail  Distribution  oj  Clothing 
(1921)— hereafter  referred  to  as  The  Clothing  Survey. 


190  PRINCIPLES  OF  MARKETING 

great  bulk  of  staple  commodities,  as  well  as  of  many  special- 
ties, is  distributed  through  such  stores.10 

II 

Technical  Aspects  of  Retail  Development:  Transporta- 
tion and  Communication. — Important  technical  developments 
of  the  last  half  century  have  had  a  marked  effect  on  both  the 
methods  and  policies  of  retail  stores.  One  of  these  develop- 
ments is  the  improvement  of  transportation  and  communica- 
tion. Although  these  improvements  are  usually  thought  of 
as  they  have  affected  the  wholesale  trade,  both  domestic  and 
foreign,  they  have  influenced  retail  trade  as  well.  Because  of 
these  changes,  it  is  now  unnecessary  for  the  retailer  to  stock 
heavily  in  normal  times.  A  call  on  the  telephone,  a  letter,  or 
a  telegram  to  the  near-by  distributing  agency  of  jobber  or 
manufacturer  serves  to  start  goods  on  the  way,  and  they  are 
soon  delivered  by  freight,  express,  parcel  post,  or  motor  truck. 
There  is  thus  made  possible  to  the  retailer  a  very  close  correla- 
tion between  supply  and  demand. 

But  these  improvements  have  also  developed  new  kinds  of 
competition.  Department  stores  have  become  important  in 
our  cities,  and  city  stores  generally  have  gained  trade  which 
formerly  went  to  the  country  general  store  and  to  the  unit 
store  in  the  small  towns.  The  products  of  remote  parts  of  the 
world  have  been  made  available,  stimulating  new  kinds  of 
retail  business  and  rendering  existing  trade  more  complicated. 
A  wholly  new  type  of  business,  the  mail  order  house,  is  ren- 
dered possible.  And,  finally,  this  development  of  communica- 
tion and  transportation  has  changed  the  consuming  public  to 
one  which,  educated  through  travel  and  the  press,  has  acquired 
a  more  varied  and  a  more  exacting  taste.11 

10  The  nature  of  large  retailing  will  be  described  in  the  following  chap- 
ter, and  the  remainder  of  this  chapter  will  be  devoted  to  the  general 
conditions  and  problems  of  retailing. 

u  This  has  had  its  effect  on  the  character  of  goods  sold  and  the  nature 
of  the  service  provided.  In  explaining  the  "drift"  of  consumers  toward 


RETAIL  DISTRIBUTION  191 

Manufacturing  Progress  and  Retailing. — Rapid  progress 
in  manufacture  has  likewise  had  marked  effects  in  the  retail 
field.  New  goods  are  constantly  brought  on  the  market,  either 
as  modifications  or  duplications  of  commodities  already  on  the 
market  or  to  meet  heretofore  unsatisfied  and  unrecognized 
wants.  Among  such  articles  are  the  safety  razor,  vacuum 
cleaner,  automobile  and  motor  truck,  cash  register,  breakfast 
foods,  canned  foods.  These  new  commodities  have  caused 
new  stores  to  develop,  have  necessitated  new  departments  in 
old  stores,  and  have  complicated  the  retailer's  buying  and 
selling  problems.  With  the  development  of  manufactured 
pharmaceutical  products  much  of  the  time  the  druggist  for- 
merly spent  in  preparing  prescriptions  and  providing  remedies 
is  no  longer  needed  for  that  purpose,  and  to  this  extent  he  has 
become  more  largely  a  distributor  of  pills  and  patent  medi- 
cines. But  on  the  other  hand  modern  manufacture  has  pro- 
vided the  drug  store  with  such  side  lines  as  toilet  articles, 
photographic  supplies,  stationery,  "soft  drinks."  and  con- 
fectionery. Book  stores  have  multiplied  wmi  the  increasing 
growth  of  the  publishing  business.  The  development  of  can- 
ning factories  and  of  packaged  products  has  worked  a  revolu- 
tion in  the  work  of  the  grocer. 

The  increased  variety  of  goods  now  offered  for  sale  has  also 
made  buying  more  difficult.  And  this  has  helped  to  continue 
the  jobber  as  an  important  feature  of  the  market  at  a  time 
when  ^improvements  in  transportation,  communication,  and 
the  financial  status  of  retailers  and  manufacturers  tend  toward 
his  elimination.  The  increased  use  of  national  advertising  by 


quality  merchandise,  C.  C.  Parlm  declares  it  to  be  due  to  (1)  finding 
out  that  good  grades  of  goods  are  better  values  in  the  end,  (2)  the 
opportunity  of  "shopping"  in  department  stores  which  has  made  women 
better  buyers,  (3)  the  part  national  magazines  play  in  carrying  style 
and  quality  ideas  to  remote  places,  so  that  last  season's  goods  cannot 
be  sold  anywhere  as  up-to-date  merchandise,  (4)  to  the  fact  that  women 
have  become  educated  to  the  importance  of  good  buying. — C.  C.  Parlin, 
The  Merchandising  of  Textiles  (Pub.  by  the  National  Wholesale  Dry 
Goods  Association),  pp.  33-35. 


192  PRINCIPLES  OF  MARKETING 

manufacturers  and  wholesalers  has  so  stimulated  the  demand 
for  certain  products  that  the  retailer  is  often  forced  to  carry 
them  against  his  willy  in  order  to  keep  the  trade  of  customers 
who  are  induced  to  call  for  them  by  the  sales  efforts  of  their 
producers.  These  advertisers  have  made  the  dealer's  position 
even  more  difficult  by  means  of  the  propaganda  by  which  they 
have  tried  to  educate  consumers  against  the  substitution  of 
other  goods  for  the  advertised  product.  This  increases  the 
variety  of  such  goods  he  must  handle  and  slows  up  the  turn 
of  his  stock,  and  frequently  the  profit  on  these  lines  is  rela- 
tively small.  Such  a  condition  tends,  of  course,  to  offset  the 
advantages  which  are  derived  from  improved  transportation 
and  communication.  Furthermore,  the  products  of  remote 
areas  have  been  made  available,  and  these  have  added  further 
to  the  variety  of  goods  demanded. 

This  increased  variety  of  merchandise,  together  with  the 
fact  that  a  greater  volume  of  goods  per  capita  is  being  pro- 
duced than  in  former  years,  has  caused  retailing  to  become 
relatively  more  important.  In  addition  to  the  new 
commodities  now  produced,  factories  manufacture  goods 
formerly  made  in  the  home,  and  these,  when  sold  back 
to  the  home,  call  for  retail  service  not  formerly  needed.  As 
clothing — first  men's  and  then  women's  and  children's — butter, 
and  cheese  have  come  to  be  made  in  factories,  need  arises  for 
retail  service  which  was  unnecessary  when  these  goods  were 
made  in  the  home.  The  large  scale  manufacture  of  ready- 
made  clothing  has  added  men's  and  women's  clothing  depart- 
ments to  department  stores  and  has  brought  in  three  new 
specialty  stores,  the  men's  and  the  women's  suit  shops  and 
the  children's  shop.  The  extension  of  the  factory  system  to 
the  manufacture  of  dairy  products,  the  slaughter  of  meat,  the 
canning  of  foods,  and  the  manufacture  of  millinery,  has  had 
similar  effects.  This  has  increased  the  number  of  persons 
engaged  in  retailing,  as  well  as  the  number  of  retail  stores. 

Finally,  the  development  of  brandaek-adyertised,.  packaged 
commodities  has  also  affected  retailing.  It  has  removed  much 


RETAIL  DISTRIBUTION  193 

of  the  trouble  of  weighing  and  packaging,12  has  rendered  it 
easier  to  keep  the  store  neat  and  sanitary,  has  changed  the 
selling  problem  by  making  sale  by  description — including  the 
brand  of  the  maker  or  merchant — take  the  place,  many  times, 
of  the  unaided  efforts  of  the  retailer.  This  development  has 
also  removed  from  the  retailer  a  large  amount  of  the  ultimate 
responsibility  for  the  quality  of  the  goods  delivered.  Pro- 
ducers are  more  and  more  taking  upon  their  own  shoulders 
a  large  part  of  the  responsibility  for  sales  and  quality.13 

Ill 

The  developments  which  have  just  been  summarized,  to- 
gether with  the  increased  selling  efforts  of  the  manufacturer 
and  the  changed  methods  of  wholesaling  described  in  previous 
chapters,  have  had  important  influences  on  the  operation  of 
retail  stores.  These  conditions  have  rendered  the  performance 
of  some  of  the  retail  functions  more  difficult  than  they  have 
be"en  in  the  past;  others  are  easier  to  perform. 
I/  Buying. — Perhaps  the  most  difficult  retail  function  is  buy- 
ing. This  is  to  be  expected.  For  the  service  of  the  retailer 
is  to  assemble  goods  for  dispersion  to  the  consumer  at  the 
latter's  convenience.  This  usually  means,  also,  at  the  mo- 
mentary demand  of  the  consumer.  Consequently,  the  retailer 
is  forced  to  estimate  in  advance  what  these  demands  will  be, 
and  to  be  prepared  to  fill  them  as  exactly  as  he  can.  To  do 
this,  he  must  invest  in  stock,  or  arrange  to  receive  credit 
from  the  supply  houses.  Then,  when  the  goods  are  bought, 
they  must  be  stored  and  prepared  for  sale.  If  products  de- 

"The  use  of  packaged  goods  increased  during  the  World  War.  See, 
for  example,  Harvard  Bureau  of  Business  Research,  Bui.  No.  13  (1919), 
Management  Problems  in  Retail  Grocery  Stores,  p.  31. 

13  These  points  are  commented  on  at  some  length  in  Chap.  XIX.  By 
producers  in  this  case  is  meant  those  whose  name  the  trade  connects 
with  a  product.  A  branded  product,  for  example,  may  be  sold  under 
a  manufacturer's  brand  or  a  jobber's  brand,  or  it  may  be  branded  by 
the  retailer. 


194  PRINCIPLES  OF  MARKETING 

teriorate,  or  if  the  demand  ceases,  or  is  not  as  brisk  as  antici- 
pated the  dealer  will  suffer  loss.  But  if  he  does  not  have  the 
products  his  trade  calls  for  he  is  in  danger  of  losing  its  patron- 
age. Finally,  after  the  goods  are  ordered  and  in  his  store, 
the  merchant  must  often  deliver  them  to  his  customers,  to 
many  of  whom  he  may  grant  credit. 

The  size  of  stock  which  it  is  necessary  to  have  on  hand  in 
order  to  do  a  given  volume  of  business  in  most  lines  is  now_ 
much  less  than  it  was  in  the  past.  Improvements 
in  transportation  and  communication  have  brought  about  the 
better  dissemination  of  market  news,  increased  the  use  of 
traveling  salesmen  sent  out  by  manufacturers  and  jobbers,  and 
speeded  up  deliveries.  The  first  helps  the  merchant  to  keep 
posted  on  market  trends,  and,  with  the  last  two,  has  made  less 
essential  the  former  semi-annual  trip  to  inspect  and  buy  goods 
in  the  wholesale  market.  The  increasing  competition,  more- 
over, of  manufacturers  with  jobbers,  and  of  each  of  these 
classes  among  themselves,  has  led  to  a  further  speeding  up  of 
deliveries,  as  well  as  to  a  willingness  on  their  part  to  deliver 
small  orders  at  frequent  intervals.  The  merchant  can  keep 
in  constant  touch  with  his  sources  of  supply,  and,  with  quick 
deliveries,  he  need  not  order  in  such  large  amounts  as  for- 
merly. This  not  only  reduces  his  financing  and  storing  prob- 
lems, but  it  reduces  the  risk  of  physical  and  market  loss. 

Selling  Assistance  from  Manufacturers  and  Jobbers. — 
It  has  been  shown  that  the  retail  merchant  receives  a  great 
deal  of  assistance  in  selling  from  manufacturers  and  jobbers. 
A  part  of  this  is  direct,  as  illustrated  by  some  of  the  forms 
of  dealer  cooperation:  window  cards,  electros,  circulars  mailed 
to  his  customers,  and  advice  on  selling,  accounting,  and  other 
retail  problems.14  Some  assistance  is  indirect,  but  often  of 
great  importance.  The  "national"  advertising  of  manufac- 
turers is  the  chief  indirect  item.  In  so  far  as  the  manufac- 

14  See  P.  T.  Cherington,  The  First  Advertising  Book,  Chap.  IV;  and 
Paul  W.  Ivey,  "The  Manufacturer's  Marketing  Problem,"  Administra- 
tion, Vol.  I  (Mar.,  1921),  pp.  341-347. 


RETAIL  DISTRIBUTION  195 

turer's  efforts  are  truly  effective  in  linking  the  retailer  with 
the  demand  created,  the  retailer's  selling  problem  is  by  so 
much  made  easier.  But  to  the  extent  that  all  competing 
dealers  tend  to  link  up  with  such  efforts,  it  simply  means  that 
the  force  of  competition  is  felt  at  other  points. 

But  the  dealer  need  not  be  a  passive  factor  in  selling.  For 
he  himself  can  influence  tfte  demand  for  his  goods  and  services. 
Good  service  in  performing  the  various  functions  of  retailing 
is,  for  the  small  retailer,  the  most  important  means  of  doing 
this.  And  both  large  and  small  dealers  utilize  modern  aggres- 
sive selling  with  great  success.  Advertising,  suggestive  ar- 
rangement of  merchandise,  well  selected  stocks,  well  performed 
services,  attractive  store  surroundings,  trained  salesmen — all 
are  used  by  aggressive  retailers  to  create  a  demand  for  their 
products  and  their  services. 

Tendency  Toward  Better  Service. — Under  modem  con> 
petitive  conditions  the  tendency  in  retailing  has  been  toward 
better  and  better  service.  The  retailer's  individual  problem  is 
to  improve  his  service,  but  to  do  it  at  the  lowest  possible  cost 
and  to  cover  this  cost  through  a  large  enough  margin  on  a 
sufficient  volume  of  sales.  This  is  true  of  all  service  indus- 
tries, but  because  of  the  very  great  emphasis  which  has  been 
put  on  improvement  in  service  in  retailing  and  the  effect  this 
has  had  in  increasing  the  cost  of  retailing  goods,  it  is  well  to 
emphasize  particularly  this  feature  of  the  retail  business. 
This  demand  for  service  is  due  in  part  to  real  consumer  de- 
mand and  in  part  to  the  limits  within  which  retail  competition 
has  been  confined  by  the  encroachments  of  the  manufacturer 
and  the  jobber  upon  parts  of  the  retail  field — particularly  in 
the  packaging,  branding,  and  advertising  previously  men- 
tioned. 

**~5 

Advertising  and  the  Retailer. — Advertising  tends  to  lower 
the  cost  ofjselling  at^retail.  That  this  may  result  from  the 
manufacturer's  advertising  has  already  been  suggested.  The 
advertising  with  which  the  consumer  comes  in  contact  in  his 
daily  paper,  in  magazines,  on  street  cars,  sign  boards,  dodgers, 


196  PRINCIPLES  OF  MARKETING 

and  in  the  store,  tends  to  lower  selling  cost  because  it  does 
more  cheaply  sales  work  which  would  otherwise  have  to  be 
done  by  personal  solicitation.15  Furthermore,  when  the  con- 
sumer has  decided,  or  has  been  influenced,  in  favor  of  certain 
goods,  it  takes  far  less  time  to  make  a  sale,  and  individual 
sales  may  be  larger  in  some  cases  because  the  goods  are  thus 
known.  Advertising,  moreover,  brings  new  merchandise  to 
the  attention  of  consumers  and  informs  them  when  and  where 
goods  they  particularly  desire  are  on  sale.  And  dealers, 
through  advertising  are  enabled  to  move  slow  stock  from  their 
shelves  with  greater  speed.  In  all  of  these  things  the  time 
of  the  clerk  is  saved,  and  many  sales  are  made  which  would 
be  too  costly  to  close  if  reliance  were  placed  on  retail  sales- 
men alone — sales  which  could,  however,  never  be  made  with- 
out the  exertion  of  sales  effort. 

New  Problems. — But  these  modern  developments  are  not 
all  to  the  retailer's  advantage.  CThe  increase  in  the  number 
and  variety  of  products  has  made  buying  and  assembly  more 
difficult.16^)  The  retailer  must  now  choose  from  among  great 
numbers  of  similar  products  the  ones  which  his  customers  will 
demand  and  like,  and  which  will  net  him  a  profitable  margin 
over  costs.  The  development  of  brands,  labels,  trade-marks, 
and  especially  of  products  nationally  advertised  has  accentu- 
ated the  problem.  When  there  are  several  similar  products 
which  consumers  ask  for,  and  even  insist  on  having,  the  stock 
of  goods  which  the  dealer  must  carry  is  greatly  increased. 
For  to  carry  a  sufficient  stock  of  five  brands  of  shaving  soap, 
tooth  paste,  or  baking  powder  to  meet  all  demands  involves  a 
much  larger  stock  than  is  necessary  to  supply  the  same  de- 
mand when  but  one  or  two  brands  need  to  be  carried.  /  The 
small  margin  on  which  some  of  these  goods  are  sold  is  sup- 
posedly offset  by  the  higher  rate  of  turnover.  But  when  it  is 

"See  p.  16,  note  8,  and  pp.  520-524. 

16  See  Harvard  Bureau  of  Business  Research,  Bui.  No.  13,  Manage- 
ment Problems  in  Retail  Grocery  Stores,  pp.  32-33. 


RETAIL  DISTRIBUTION  197 

necessary  to  stock  several  competing  products  this  advantage 
tends  to  be  minimized.  J 

Finally,  some  of  the  service. developments  of  the  department 
stores  have  had  an  important  effect  on  retailing.  In  their 
efforts  to  enlarge  their  volume  of  business  many  stores  try  to 
imitate  some  of  the  services  of  these  large  e^tubliyhlnent"s7~and 
thus  they  greatly  increase  their  costs.  The  luxurious  fixtures, 
liberal  grant  of  credit,  return  privileges,  and  elaborate  delivery 
service  of  many  small  stores  have  proved  an  expense  not  war- 
ranted by  their  volume  of  business.  The  extreme  to  which 
these  have  been  carried  has  evidently  not  met  the  approval  of 
all  consumers.  For  the  mail  order  house,  the  cash-and-carry 
and  the  serve-self  stores  with  their  emphasis  on  a  less  elabo- 
rate service  have  made  remarkable  progress  in  recent  years. 
So  great  have  the  inroads  of  these  stores  been  that  the  older 
type  of  unit  stores  has  had  to  look  closely  to  its  merchandising 
policies  and  methods — not  only  to  improve  its  service  but  to 
reduce  its  costs. 

Widespread  Inefficiency. — There  is  ample  room  for  im- 
provement in  retail  methods.  Inefficient  salesmanship,  poorly 
selected  stocks,  excessive  inventories,  and  high  costs  are  alto- 
gether too  common  among  unit  stores.  Retailing  is  costly  at 
best.  For  the  small  amounts  in  which  goods  are  sold,  the 
wide  varieties  in  which  they  are  demanded,  and  the  physical 
and  commercial  deterioration  to  which  consumption  goods  are 
often  subject  make  this  the  most  costly  phase  of  our  marketing 
system.  Of  the  price  paid  by  the  final  consumer  for  staple 
commodities,  from  20  to  50  per  cent,  often  more,  is  the  margin 
which  goes  to  cover  the  cost  of  retailing.17  There  are,  how- 
ever, wide  differences  in  costs  among  retail  stores  in  the  same 
lines  of  business.  This  is  in  part  due  to  the  fact  that  the 
public  will  continue  to  patronize  inefficient  stores  because  they 
are  convenient.  It  results  also  from  the  fact  that  prices  have 
been  rising  for  years,  a  condition  which  has  tended  to  keep  the 

"  For  some  typical  margins  see  pp.  510,  515-518. 


198  PRINCIPLES  OF  MARKETING 

inefficient  in  the  field  longer  than  they  could  otherwise  have 
remained.18 

Retail  Methods  and  Policies. — This  discussion  of  some  of 
the  important  conditions  of  modern  retailing  leads  naturally 
to  a  statement  of  the  methods  and  policies  of  modern  retail 
merchandising.  Competition  is  keen,  efficient  methods  have 
been  introduced,  and  new  types  of  stores  have  been  developed. 
Before  discussing  these  conditions,  however,  the  reader  should 
be  cautioned  that  not  all  of  the  tendencies  just  described,  nor 
those  about  to  be  discussed,  are  necessarily  found  in  all  stores. 
Thus,  many  unit  stores,  department  stores,  chain  stores,  and 
mail  order  houses  have  their  own  brands  and  do  not  handle 
manufacturers'  or  jobbers'  brands  extensively;19  many  small 
stores  refuse  to  give  credit,  or  do  not  deliver;  and  the  familiar 
cash-and-carry  store  and  the  self-service  store  appear  to  be 
distinct  movements  away  from  present  methods  in  retail 
service. 

A  given  store  can  compete  on  a  basis  of  price,  by  selling  at 
a  lower  price  than  do  its  competitors;  it  can  handle  quality 
merchandise  and  charge  quality  prices;  or  it  may  emphasize 
the  nature  of  the  service  it  renders  in  meeting  the  consumer's 
needs.  •  Various  modifications  and  combinations  of  these  poli- 
cies are  always  evident  in  the  retail  trade. 

Elaboration  of  Service. — The  point  of  first  importance  in 
describing  merchandising  policies  is  the  elaboration  of  the 
retail  service,  through  carrying  a  wide  selection  of  com- 
modities, and  by  means  of  such  measures  as  the  increased 
elegance  and  cleanliness  of  the  store,  prompt  delivery  service, 
and  the  granting  of  credit.  It  is  important  to  point  out  the 
distinction  between  goods  and  services.  An  order  of  goods 

M  The  assertions  here  made  are  not  supported  by  definite  data  because 
they  are  now  generally  recognized  as  true  by  students  of  retailing.  For 
statistical  proof  and  for  further  discussion  see  the  reports  of  the  Bureaus 
of  Business  Research  of  Harvard  and  Northwestern  Universities,  and 
Nystrom,  The  Economics  oj  Retailing. 

M  Many  small  stores— drug  stores  in  particular — sell  goods  under  their 
own  brand. 


RETAIL  DISTRIBUTION  199 

which  the  consumer  goes  to  the  store  to  purchase,  pays  for, 
and  carries  to  his  home  is  a  different  commodity  from  that  for 
which  the  order  is  taken  by  the  delivery  boy  or  over  the  tele- 
phone, sold  on  credit,  and  delivered  at  the  customer's  home. 
For  the  cost  of  order-taking,  of  carrying  the  customer's  ac- 
count, and  of  delivery  must  be  added  to  the  one,  whereas 
these  do  not  enter  into  the  merchandising  cost  of  the 
other. 

An  important  aspect  of  retail  service,  which  is  another  im- 
portant cause  for  the  high  cost  of  retailing,  is  the  ease  with 
which  the  consumer  can  reach  the  store,  and  the  certainty 
with  which  he  can  get  exactly  what  he  desires.  The  first 
accounts  on  the  one  hand  for  the  innumerable  small  neigh- 
borhood stores,  often  inefficiently  and  hence  expensively  oper- 
ated; and,  with  the  second,  it  accounts  for  the  tendency  for 
stores  to  concentrate  in  "downtown"  areas  where  very  high 
rents  must  be  paid.20  The  second  accounts  also  for  the  wide 
variety  of  goods  which  modern  stores  carry.  This  variety  of 
goods  increases  the  buying  costs  of  both  wholesalers  and 
retailers,  increases  the  total  investment  in  stocks,  slows  up 
the  stock-turn,  and  makes  selling  more  difficult. 

Other  Policies. — Three  other  policies  of  modern  retailing 
which  affect  the  consumer  have  become  characteristic:  one 
price  to  all,  no  solicitation  in  the  store,  and  the  privilege  of 
returning  goods  which  do  not  meet  the  consumer's  fancy  or 
which  are  not  as  they  were  represented  to  be.  Fixing  a  price 
for  a  product  and  making  it  public  to  all  prospective  buyers 
has  largely  eliminated  the  higgling  in  the  market  so  charac- 
teristic of  early  retailing.  This  policy  has  likewise  gone  far 
to  remove  the  suspicion  which  the  consumer  formerly  felt  when 
buying.  It  is  probable  that  no.  other  policy  could  generally 
prevail  to-day.  With  the  multiplicity  of  goods  appearing 
on  the  market  neither  the  consumer  nor  the  storekeeper  and 
his  clerks  have  the  time,  or  even  the  knowledge  of  prices  and 

20  Northwestern  University  Bureau  of  Business  Research,  The  Cloth' 
ing  Survey,  pp.  103,  106-137. 


200  PRINCIPLES  OF  MARKETING 

qualities,  to  "bargain"  over  the  small  purchases  now  common 
to  the  retail  trade. 

This  same  multiplicity  of  products  makes  it  necessary  for 
the  consumer  to  look  and  consider  before  purchasing.  And 
to  make  him  more  at  ease  in  this  and  so  to  gain  and  keep 
his  custom,  the  policy  of  no  solicitation  in  the  store  has  been 
generally  adopted.21  The  privilege  of  returning  unsatisfac- 
tory goods  under  reasonable  restrictions  has  gone  far  to  in- 
crease further  the  confidence  of  the  consuming  public  in  their 
retail  dealers.  Marshall  Field's  alleged  dictum,  "The  cus- 
tomer is  always  right,"  defines  what  is  a  fairly  settled  policy 
among  the  better  stores.22 

Retail  Brands. — A  final  policy  of  modern  retailing  is  the  in- 
troduction of  retail  brands,  that  is,  of  goods  bearing  the  brand 
of  the  retailer  rather  than  that  of  the  manufacturer  or  whole- 
saler. This  is  a  policy  which  is  characteristic  of  department 
stores,  mail  order  houses,  and  chain  store  systems.  But  it  is 
by  no  means  confined  to  these.  Specialty  stores  in  the  larger 
cities,  in  particular,  often  adopt  this  sales  policy.  The  classes 
of  stores  which  have  been  mentioned  are  commonly  doing  busi- 
ness on  a  large  scale,  and  they  find  it  necessary  to  use  every 
available  means  to  call  to  their  store  and  to  maintain  the 
patronage  of  a  large  clientele.  By  branding  the  merchandise 
they  sell  these  retailers  endeavor  to  influence  consumers  to 
buy  their  goods,  which  can  be  bought  only  of  them.  There 
are  also  price  advantages  to  be  gained  from  branding.  Cut 
price  selling  by  other  stores  is  not  felt  so  keenly  when  the 

21  This  policy  does  not  mean  that  efforts  are  not  made  to  introduce 
skillful  selling.  This  is  being  done  more  and  more.  But  the  sales 
effort  is  not  carried  to  the  extent  of  making  the  prospective  buyer 
uncomfortable  or  resentful. 

33  This  policy  has  been  carried  so  far  by  some  stores  and  abused  by 
the  public  so  freely  that  some  merchants  have  endeavored  to  take 
advantage  of  the  unsettled  conditions  of  the  past  few  years  to  place 
necessary  restrictions  on  this  practice. 


RETAIL  DISTRIBUTION  201 

merchant  sells  goods  under  his  own  trade-mark,  since  the 
goods  are  not  directly  comparable,  so  far  as  the  consumer  is 
able  to  judge,  with  similar  goods  sold  in  other  stores.  This 
same  fact  sometimes  enables  the  retailer  to  maintain  a  wider 
margin  on  his  branded  merchandise  than  he  could  maintain 
on  merchandise  branded  by  wholesalers  and  manufacturers 
and  sold  in  competing  stores,  as  well  as  in  his  own.23 

IV 

Certain  outstanding  policies  are  evident  in  the  organization 
and  management  of  the  modern  store.  In  common  with  in- 
dustry generally  the  tendency  to  large  plants  and  large  organi- 
zations has  been  felt  in  the  retail  business,  outstanding  exam- 
ples of  which  are  the  department  store,  the  mail  order  house, 
and  the  chain  store  system.  And  although  the  small  store 
continues  important  and  in  many  lines  is  apparently  holding 
its  own,  the  growth  and  the  importance  of  the  large  retail 
merchandising  establishment  continue  to.  increase.24 

Stock-Turn. — Another  important  aspect  of  modern  mer- 
chandising is  the  emphasis  which  is  placed  upon  a  rapid  mer- 
chandise turnover,  or  stock-turn.  The  usual  method  of  de- 
termining stock-turn  is  to  divide  the  merchandise  sold  during 
a  given  period  by  the  average  stock  on  hand 25  during  that 

23  Branding  is  further  discussed  on  pp.  403-406  and  in  its  relation  to 
jobbing  on  pp.  142-146.    See  also  Paul  T.  Cherington,  The  Elements  of 
Marketing  (1920),  Chap.  XIV;  and  H.  B.  Vanderblue,  "The  Marketing 
Function  of  Advertising,"  Advertising  and  Selling,  Vol.  XXIX  (June 
5,  1920),  pp.  16-18. 

24  Figures  do  not  appear  to  be  available  to  make  certain  the  exact 
relative  status  of  these  two  classes  of  organizations  now  and  at  previous 
times. 

39  The  average  stock  on  hand  is  the  average  inventory.  When  an  in- 
ventory is  taken  but  once  a  year  the  average  of  the  inventory  at  the 
end  of  the  previous  year  and  of  the  present  year  is  commonly  used. 
Since  the  stock  is  often  lower  than  normal  at  inventory  time  this  makes 
the  turnover  appear  more  rapid  than  it  really  is. 


202  PRINCIPLES  OF  MARKETING 

period,  using  cost  figures  in  each  case.26  The  resulting  figure 
is  the  turnover  for  the  period.  Thus,  if  a  store  sells  during 
a  year  merchandise  which  cost  $360,000,  and  if  it  had  on  hand 
during  the  year  an  average  stock  of  goods  which  cost  $72,000 
the  merchandise  turnover  would  be 

360,000 

•72>ooo  ==  5   (turns  per  year).27 

The  rapidity  of  the  stock-turn,  or  turnover,  is  an  important 
barometer  of  good  merchandising.  It  also  serves  as  a  means 
of  comparison  between  departments,  between  different  periods 
of  time,  between  stores,  and  between  lines  of  business.  In  it 
are  seen  the  signs  which  point  to  the  effectiveness  or  ineffec- 
tiveness of  the  buying  plan,  the  price  plan,  and  the  selling 
plan.  The  business  aim  of  the  merchant  is  to  so  order  his 
merchandising  that  large  net  profits  will  be  made.  This  may 
result  from  a  rapid  stock-turn  with  a  small  margin  of  net 
profit  on  each  turn,  from  a  slower  stock-turn  with  a  wider 
margin  of  net  profit,  or  it  may  result  from  a  rapid  turn,  but 
accompanied,  likewise,  by  a  wide  margin  of  net  profit.  These 
Cases  are  developed  in  the  three  accompanying  illustrations. 

CASE  I 

Annual  sales  at  cost   $100,000 

Average  stock  at  cost 10,000 

Annual  stock-turn   10  times 

Net  profit  per  turn 1%   ($100) 

Annual  profit   (10  turns) $     1,000 

This  is  10  per  cent  on  the  average  investment  in 
stock. 

26  Selling  price  figures  may  be  used.    The  important  thing  is  to  use 
the  same  figures  for  both  sales  and  average  stock  on  hand.    See  Clifton 
H.  Field,  Retail  Buying  (1917),  Chap.  X. 

27  Turnover  is  sometimes  figured  by  determining  the  number  of  days, 
on  the  average,  which  it  takes  to  sell  out  the  average  stock  on  hand. 
If  the  sales  are   $360,000  per  year  this   is  at   the   rate   of  $1,000   per 
day   (counting  360  days).     An  average  inventory  of  $72,000  is,  there- 


RETAIL  DISTRIBUTION  203 

CASE  II 

Annual  sales  at  cost   $100,000 

Average  stock  at  cost  20,000 

Annual   stock-turn    5  times 

Net  profit  per  turn 2%  ($400) 

Annual  profit  (5  turns)  $    2,000 

This,  also,  is  10  per  cent  on  the  average  invest- 
ment in  stock. 

CASE  III 

Annual  sales  at  cost  $100,000 

Average  stock  at  cost 10,000 

Annual  stock-turn   10  times 

Net  profit  per  turn   2%   ($200) 

Annual  profit  (10  turns)    $     2,000 

This  is  20  per  cent  on  the  average  investment  in 
stock. 

Stock-Turn  and  Prices. — If  low  prices  which  net  extremely 
small  margins  will  increase  the  stock-turn  sufficiently  to  make 
the  net  annual  return  greater  than  it  will  be  with  higher  prices 
and  a  larger  margin  but  slower  turnover,  that  policy  should 
be  adopted.  The  problem  of  the  retailer  is  to  determine  the 
best  relation  between  his  profit  margin  on  individual  turns  at 
particular  prices  and  the  rate  of  turnover  which  he  obtains  at 
these  prices.  In  the  staple  lines,  such  as  dry  goods,  groceries, 
meats,  and  hardware,  the  policy  of  a  rapid  turnover  on  small 
margins  is  largely  favored.  This  tendency  has  resulted  in 
part  from  the  process  of  education  carried  on  by  manufac- 
turers of  advertised  branded  merchandise,  who  emphasize  the 
rapid  turnover  possible  and  the  small  sales  effort  necessary 
to  sell  their  goods.  Perhaps  a  greater  stimulus  to  rapid  turn- 
over has  been  the  example  of  the  cut  price  or  low  price  stores 
who  use  the  price  appeal,  and  consequently  to  which  a  rapid 

fore,  seventy-two  days'  sales.  This  figure  can  be  turned  into  an 
annual  turnover  rate  by  dividing  360  (days  in  a  year)  by  72  (days' 
sales,  of  the  average  stock)  or  five  turns  per  annum. 


204  PRINCIPLES  OF  MARKETING 

turnover  is  an  important  criterion  of  success.  In  other  lines, 
such  as  jewelry,  high  class  furniture,  and  fancy  goods,  the  turn- 
over is  usually  much  slower;  and  it  is  not  sufficiently  stimu- 
lated by  low  prices  to  warrant  dealers  in  keeping  their  margins 
at  a  low  point.  In  such  cases  a  proper  purchase  plan  and 
high  grade  sales  efforts  are  of  greater  relative  importance. 

Buying  and  Sales  Effort. — The  importance  of  the  price 
policy  in  its  relation  to  turnover  may  easily  be  over-em- 
phasized. Of  perhaps  greater  importance  is  the  skill  with 
which  buying  is  done  and  the  success  of  the  sales  campaign. 
Nothing  is  so  likely  to  slow  up  turnover  as  the  purchase  of 
goods  in  larger  quantities  than  the  trade  demands,  and  the 
purchase  of  goods  which  do  not  sell.  Yet  both  causes  for  a 
slow  stock-turn  are  constantly  in  operation.  Quantity  prices 
and  the  sales  efforts  of  supply  houses  constantly  lead  to  over- 
stocking. And  the  excessive  variety  of  goods  offered  for  sale, 
and  pushed  by  the  skillful  merchandising  of  manufacturers, 
leads  also  to  the  purchase  of  excess  stock  and,  as  well,  to  the 
frequent  purchase  of  stock  which  cannot  be  moved.  Good 
buying,  then,  is  essential  both  to  meeting  the  demands  of  con- 
sumers and  to  keeping  down  the  average  inventory  in  relation 
to  sales.  Since  the  average  inventory  is  the  denominator  in 
the  turnover  fraction  it  is  evident  that  good  buying  is  essential 
to  a  rapid  stock-turn.  But  the  numerator  of  the  turnover 
fraction  is  the  annual  volume  of  sales,  and  success  in  retailing 
depends  on  moving  the  goods  from  the  shelves  once  they  are 
bought.  This  starts  with  good  buying,  but  successful  selling 
may  mean  the  difference  between  a  small  and  a  high  turnover, 
and  a  large  volume  of  business. 

Further  Consideration  of  Stock-Turn. — There  are  also 
specific  advantages  which  accrue  from  a  rapid  turnover,  and, 
conversely,  disadvantages  which  arise  from  a  slow  turnover. 
With  a  rapid  turnover  the  investment  necessary  to  do  a  given 
volume  of  business  is  reduced.  Thus  in  Case  I  an  invest- 
ment of  $10,000  in  stock  is  enough  to  do  the  same  volume 
of  business  as  an  investment  of  $20,000  in  Case  II.  There 


RETAIL  DISTRIBUTION  205 

is  likewise  a  savijig-aiariJterest  on  the  investment  in  stock  when 
the  inventory  is  small.  Furthermore,  the  risks  and  losses  of 
carrying  a  large  inventory  are  reduced.  "Tor^tfeere^B  less 
dangep-t7f~physical  deterioration,  a  smaller  number  of  goods 
will  be  left  to  dispose  of  at  marked-down  prices  at  Mie  end  of 
a  season  or  following  a  change  of  styles,  and  shelf-worn  goods 
will  be  less  in  evidence.  •  Stocks  are  more  likely  to  be  fresh 
and  up-to-date,  and  they  will  occupy  less  storage  space.28 

Finally,  when  a  rapid  stock-turn  is  brought  about  with  an 
increase  in  the  total  volume  of  business,  economies  in  cer- 
tain types  of  expense  will  result,  which  unless  offset  by  in- 
creases in  others  will  reduce  the  net  unit  cost  of  doing  business. 
The  expenses  which  tend  to  be  reduced  are  rent,  interest,  heat, 
light,  insurance,  etc.  But  the  more  rapid  turnover  and  the  in- 
creased volume  of  business  may  have  been  made  possible  by 
an  increase  in  the  buying  and  selling  expense,  and  so  cause 
an  increase  in  the  total  expense  for  buying,  clerk  hire,  adver- 
tising, express  and  delivery  costs,  etc.  The  net  result  on  unit 
expense  will  depend  on  whether  the  first  costs  reduce  more 
rapidly  than  the  latter  increase.29 

Advertising  and  Departmentization. — Closely  related  to 
the  question  of  turnover  is  the  development  of  retail  adver- 
tising and  departmentizing.  Advertising  in  particular  is  util- 
ized as  a  means  of  stimulating  not  only  the  total  business, 
but  also  sales  in  new  lines,  and  in  those  that  are  moving 
slowly.  The  large  stores  can  utilize  advertising — particularly 
newspaper  advertising — to  greater  advantage  than  small  stores, 
for  a  given  expenditure  will  influence  more  people.  But  many 
retail  stores,  on  the  other  hand,  thrive  as  small  stores  without 

28  A  good  discussion  of  turnover  and  of  the  need  for  accurate  stock 
control   will   be   found   in   Merchandise    Turnover  and  Stock   Control 
(1921),  a  pamphlet  published  by  the  Domestic  Distribution  Department 
of  the  Chamber  of  Commerce  of  the  United  States,  Alvin  E.  Dodd, 
Manager,  Washington,  D.  C. 

29  See  W.  H.  Ingersoll,  "How  Distribution  Costs  Can  Be  Lowered/' 
Marketing,  March,  1920;  also  Northwestern  University  Bureau  of  Busi- 
ness Research,  The  Clothing  Survey  (1921),  pp.  464-92. 


206  PRINCIPLES  OF  MARKETING 

the  need  for  expensive  advertising  to  stimulate  demand.  In 
fact,  so  true  is  this  that  large  stores  are  found  to  spend  rela- 
tively more  for  advertising  than  do  small  stores.30  Inasmuch 
as  personal  solicitation  either  in  the  store  or  without  is  seldom 
resorted  to  for  the  purpose  of  demand  creation,  retail  establish- 
ments must  depend  on  the  nature  of  their  service,  coupled  with 
skilled  suggestion,  and  supplemented  by  the  advertising  cam- 
paign, to  stimulate  their  business. 

The  orderly  arrangement  of  stock  according  to  the  nature 
of  the  product  or  of  selling  conditions  was  an  early  develop- 
ment in  modern  merchandising,  and  if  it  did  not  lead  to  mod- 
ern departmentizing,  at  least  it  is  the  principle  on  which  de- 
partmentizing  is  based.  As  retail  establishments  have  grown 
in  size  and  as  the  variety  of  goods  dealt  in  has  increased,  it 
has  become  increasingly  difficult  for  the  proprietor  to  control 
the  great  mass  of  details  inherent  in  merchandising.  There 
comes  a  rather  definite  limit  to  the  size  of  establishment 
which  can  be  administered,  and  to  the  variety  of  goods  which 
can  be  sold  under  the  immediate  supervision  of  the  proprietor. 
This  logically  leads  to  the  division  of  the  business  into  de- 
partments, according  to  classes  of  goods  or  the  nature  of  the 
administrative  work. 

Goods  are  departmentized  by  classes  or  relations  in  use  so 
that  the  proprietor  can  keep  close  track  of  the  stocks  in  each, 
and  of  their  rate  of  turnover  and  profit.  He  is  thus  enabled 
to  know  where  the  weak  points  of  his  system  are,  as  well  as 
the  strong.31  When  the  business  becomes  large  enough,  de- 
partment managers  are  introduced  to  take  charge  of  the 
work  in  a  department;  generally  to  oversee  the  buying,  sell- 
ing, pricing,  and  care  of  the  stock.  They  are  usually  held  re- 

30  Northwestern   University   Bureau    of   Business   Research,   op.   cit., 
p.  291. 

31  Turnover  figures  for  a  whole  store  are  seldom  of  value  to  the  man- 
agement.    To  have  a  real  effect  on  buying,  selling,  or  pricing  policies 
turnover  must  be  obtained  by  departments,  or  even  better  by  individual 
products. 


RETAIL  DISTRIBUTION  207 

sponsible  for  results  in  their  department.  In  the  service  de- 
partments it  is  also  found  advisable  to  arrange  the  work  by 
departments,  although  this  is  less  likely  to  be  necessary  in 
smaller  stores. 


CHAPTER  XII 
LARGE  SCALE  RETAILING 

I 

Advantages  of  Large  Scale  Retailing  Summarized. — The 
following  advantages  inhere  in  greater  or  less  degree  in  all  large 
retail  establishments;  that  is,  in  department  stores,  mail  order 
houses,  and  chain  stores:1 

1.  Specialization  of  men  and  departments. 

2.  Economy  in  the  expense  for  highly  skilled  specialists, 
for  overhead  charges,  and  advertising. 

3.  Rapid  stock-turns. 

4.  A  stock  consisting  of  a  wide  variety  of  timely  mer- 
chandise. 

5.  Special  service  to  customers. 

6.  Superior  buying  advantages. 

7.  Economies  of  integration. 

Specialization  of  Men  and  Departments. — Certain  advan- 
tages of  specialization  common  to  all  large  scale  operation 
are  found  in  large  scale  retailing.  The  large  establishment  can 
have  a  special  accounting  department,  delivery  department, 
buying  department,  school  for  salesmen,  adjustment  bureau, 
credit  department,  financial  officers;  and  finally  it  is  able  to 
control  its  merchandise  operations  on  a  departmental  basis, 
and  the  work  of  each  department  can  be  divided  among 
individuals  according  to  the  class  of  goods  handled  or 

1  Alfred  Marshall  shows  that  the  pioneer  work  of  modern  large  scale 
retailing — "massive  retail  trade" — was  done  by  the  British  workiqgmen 
in  their  cooperative  enterprises.  Alfred  Marshall,  Industry  and  Trade 
(1919),  pp.  289-295. 

208 


LARGE  SCALE  RETAILING  209 

the  work  performed.2  Because  the  volume  of  work  of  each 
kind  is  large  the  personnel  becomes  skilled  and  the  time  of 
each  individual  can  be  fully  utilized  in  the  field  of  his  special 
skill.3  In  this  way  it  becomes  possible  for  the  concern  to 
employ  the  talents  and  the  time  of  each  member  of  its  staff  to 
the  best  advantage.  Furthermore,  with  so  many  employed, 
the  large  establishment  can  afford  to  devote  time  and  effort 
to  the  training  of  its  staff,  and  thus  encourage  and  develop 
each  member  to  a  greater  usefulness.  Finally,  the  large  vol- 
ume of  its  business  enables  it  to  pay  enough  to  keep  experts 
in  its  employ.4 

Economy  in  Overhead  Expense. — Aside  from  the  economy 
that  arises  from  utilizing  the  full  time  of  highly  paid  experts 
"and  of  a  specialized  staff  in  the  fields  in  which  they  are  most 
proficient,  other  economies  in  overhead  expense  are  possible. 
The  expense  of  the  plant,  including  warehouses,  rent,  heating, 
lighting,  delivery,  is  spread  over  a  large  volume  of  business, 
and  so  tends  to  be  less  per  unit  of  sales  than  in  smaller  estab- 
lishments. Unfortunately,  the  increase  in  the  kinds  of  over- 
head charges  which  such  stores  must  bear  tends  to  offset  this 
advantage,  and,  in  addition,  some  sorts  of  overhead  expense 
are  increased.5  Finally,  the  expense  for  advertising  is  likely 
to  be  less  per  unit  of  sales  than  it  is  when  competing  small 
establishments  advertise.  The  department  store  advertising 
a  sale  of  silk  goods  will  draw  customers  who  will  also  buy 
hosiery,  hardware,  and  other  products,  whereas  the  specialty 
or  unit  store  handling  but  one  line  of  products  cannot  expect 
such  widespread  results.  The  mail  order  house  through  its 

2  See  pp.  234-236. 

3  This  advantage  is  not  sure  to  result,  see  p.  222.     For  a  discussion 
of  the  general  advantages  of  specialization,  see  Alfred  Marshall,  op.  cit., 
Part  I,  Chap.  VIII,  and  pp.  233-234,  244-245,  508-509,  592. 

4  The  general  run  of  department  store  buyers  receive  from  $3,000  to 
$12,000.    In  rare  instances  much  larger  salaries  are  paid.    An  article 
by  Edward  M.  Wooley  discussing  these  salaries  as  they  were  in  1914 
appeared  in  Printers'  Ink,  Aug.  6,  1914,  pp.  8  ff. 

5  See  pp.  216-218. 


210  PRINCIPLES  OF  MARKETING 

advertisement  in  the  weekly  paper  reaches  prospects  to  whom 
it  sends  its  catalogue.  This  catalogue,  in  the  case  of  the  larger 
establishments,  advertises  thousands  of  articles.  The  single 
advertisement  for  the  chain  store  system  of  a  city  may  con- 
tain the  advertisement  of  the  goods  of  all  the  stores  in  the 
system.6 

Rapid  Turnover. — A  rapid  turnover  of  stock  is  an  aim  of 
all  good  merchandising.  It  is  not  peculiar  to  large  scale 
operations.  But  from  the  data  available  it  appears  that  if 
large  establishments  do  not  have  a  more  rapid  turnover  than 
all  competing  shops,  at  least  they  are  far  above  the  average 
of  the  smaller  stores.7  From  the  meagre  data  at  hand  it  is 
commonly  assumed  that  department  stores  turn  their  stock 
more  rapidly  than  do  general  stores,  the  nearest  comparison 
possible.  Individual  departments  probably  do  not  turn  their 
stocks  so  rapidly  as  do  the  better  unit  stores  in  competing 
lines.  Chain  stores  apparently  turn  their  stock  much  more 
rapidly  than  do  competing  unit  stores.  Figures  are  not  avail- 
able regarding  mail  order  establishments,  but  it  is  usually  as- 
sumed that  the  general  statement  will  apply  to  them. 

The  reasons  for  this  rapid  stock-turn  of  large  establishments 
are  not  far  to  seek.  In  the  first  place,  the  expert  personnel 
which  they  can  afford  to  train  or  hire  enables  them  to  buy 
with  greater  regard  for  market  demands;  and  they  can  ef- 
fectively create  demand  when  that  is  essential.  Quantity 
prices  and  large  cash  resources  give  them  advantages  in  the 
cost  of  merchandise.  To  meet  the  demand  for  variety  and 
to  carry  numerous  brands  of  similar  goods  requires  but  a 
relatively  small  stock  of  goods  in  lines  for  which  there  is 
small  demand.  Being  small  in  relation  to  the  total  volume 
of  business,  such  stocks  do  not  hold  back  the  turnover  record 

aBut  many  unit  stores  do  not  use  the  advertising  methods  large 
stores  use  and,  consequently,  have  little  or  no  advertising  expense. 
The  need  for  advertising  is  also  sometimes  considered  a  disadvantage 
of  large  stores.  See  p.  217,  note  16,  and  pp.  221-222. 

7  Nystrom  gives  some  figures  on  turnover  in  his  Economics  of  Retail- 
ing (2d  ed.,  1919),  pp.  235-236. 


LARGE  SCALE  RETAILING  211 

as  they  would  in  smaller  stores.  Furthermore,  large  stores 
are  better  able  than  small  stores  to  sell  goods  under  their  own 
brands.  This  tends  to  overcome  the  necessity  for  carrying 
competing  brands.  Finally^  the  possibility  of  changing  goods 
from  main  floors  to  the  basement  in  department  stores,  from 
one  store  to  another  in  chain  stores,  and  the  very  wide  geo- 
graphical area  to  which  the  mail  order  house  appeals,  enables 
each  to  try  out  a  slow  selling  article  in  more  than  one  market. 

Special  Services  JB  Adequate  Stock. — The  excellent  service 
which  such  stores  offer  is  another  advantage.  For  although 
good  service  is  not  monopolized  by  large  establishments,  it  is 
at  least  true  that  they  specialize  in  this  field  and  often  set 
the  pace.  Service  is  an  essential  part  of  their  merchandising 
plan.8  If  such  stores  did  not  give  excellent  service  they  could 
not  easily  hold  trade  in  competitfSh  with  unit  stores.9  The 
furnishing  of  a  wide  variety  of  fresh  ancTseasonable  goods  is 
one  aspect  of  the  service  offered  by  large  stores.  To  fur- 
nish just  what  ffffe  customer  wants  at  all  times  is  almost  im- 
possible for  the  small  general  store,  and  for  any  but  the  larg- 
est unit  stores.  This  makes  it  necessary  for  the  consumer 
to  purchase  from  many  unit  stores.  It  is  a  great  trading 
asset  of  the  large  store  to  be  able  to  supply  this  variety.10 

8  A  recent  newspaper  advertisement  of  Marshall  Field  and  Company 
is  headed  "The  Store  of  Service,"  and  the  services  described  are*:  gen- 
eral information  bureau,  personal  service  bureau,  general  reading,  writ- 
ing and  rest  rooms  for  men  and  women,  women's  silenc*  |bom,  check 
rooms,   theatre   ticket    office,   traveler's   checks  Jburea*lf,>lost-and-found 
bureau,  telegraph  office^ 'medical  room,,  postal  ^bstation,  tea  rooms, 
taxicab   sta*tion,  party   and  favor  ,.buF«*u?,   the   gift  secretary,   interior 
decorating  advisory  service,  elevators~service,  special  wrapping  of  gifts, 
model  rooms,  costume  room,  custom  apparel  sections,  fur  storage,  win- 
dow displays,  delivery  service,  "other  features  of  service,"  the  basement 
salesroom,  juvenile  floor  (including  a  playroom  for  children),  the  store 
for  men,  and  finally,  "service  in  merchandise"  and  "service  in  equipment 
and  conduct." 

9  See  pp.  214-215. 

10  The   shopping   trade    of   the   city  has   been   largely   absorbed   by 
the    department    store,    and    for    country    trade,    by    the    mail    order 


212  PRINCIPLES  OF  MARKETING 

The  examination  and  return  privilege  of  department  stores 
and  mail  order  houses  should  also  be  classed  here,  as  should 
the  rest  rooms,  fine  surroundings,  and  delivery  service  of  the 
department  stores,  and,  of  an  opposite  nature,  the  cash-and- 
carry  "privilege"  offered  by  chain  stores  with  the  resulting 
reductions  in  prices.  In  times  of  high  prices  this  chance  to 
choose  between  price  and  service  is  a  very  real  privilege  to 
persons  wishing  to  reduce  their  cost  of  living  and  willing  to 
relinquish  some  services  to  do  so.  In  fact,  it  is  sometimes 
said  that  the  sale  of  goods  stripped  of  many  of  the  ordinary 
services  of  department  and  specialty  stores  is  the  best  kind 
of  service  that  can  be  offered  by  mail  order  houses  and  chain 
stores  to  their  customers. 

Buying  Power. — The  superior  buying  advantages  of  large 
organizations  are  often  due  in  part  to  the  control  of  successive 
marketing  processes  within  the  establishment.  But  passing 
over  this  feature  for  the  present,  there  appear  to  be  certain 
advantages  in  buying  inherent  in  the  large  retail  establish- 
ment. The  specialist  features  here  as  elsewhere.  The  large 
stores  can  have  buyers  who  devote  their  entire  time  to  buy- 
ing, frequently  in  a  very  narrow  field.  They  are  in  touch  with 
the  needs  of  the  selling  department,11  with  a  thorough  knowl- 
edge of  the  goods  to  be  purchased,  as  well  as  of  qualities, 
styles,  values,  costs,  and  market  conditions.  Smaller  dealers 
cannot  afford  to  pay  the  large  salaries  needed  to  get  help 
of  this  class.  It  is  more  than  likely  that  the  proprietor  him- 
self does  the  buying,  in  addition  to  his  other  duties,  depending 
upon  his  clerks  to  assist  where  his  own  knowledge  fails. 

The  buyers  for  large  retail  establishments  are  personally 
well  equipped  and  in  addition  they  are  armed  with  weapons 

house.  Investigation  by  The  Chicago  Tribune  shows  that  in  certain 
sections  of  the  city  practically  no  shopping  goods  are  bought  in 
local  stores.— The  Book  of  Facts,  1921.  See  also  C.  C.  Parlin,  The 
Merchandising  of  Textiles,  p.  6. 

"The  buyer  is  usually  in  charge  of  sales  for  his  department  in  the 
department  store,  and  to  a  degree  in  the  mail  order  house. 


LARGE  SCALE  RETAILING  213 

which  the  small  store  can  seldom  duplicate.  In  the  first  place, 
the  very  volume  of  purchases  is_an  opening  wedge  by  which 
they  can  get  the  lowest  discounts  offered  for  quantity  pur- 
chases, frequently  even  an  "inside"  discount.  Volume  further 
assists  by  making  it  more  possible  to  utilize  and  follow  statis- 
tical averages  which  grow  out  of  past  experience,  such  as 
those  dealing  with  seasons,  sizes,  qualities,  and  similar  data 
which  will  be  of  use  to  the  buyer  in  determining  his  pplicy.12 
Coupled  with  their  large  orders  is  the  ability  to  pay  cash. 
Large  stores  are  usually  in  a  position  to  finance  themselves* 
They  do  not  depend  on  manufacturers  or  middlemen.  Even 
when  such  firms  borrow  money  with  which  to  pay  cash  for 
current  needs,  they  can  get  terms  better  from  banks  and  in- 
vestors than  those  offered  to  their  smaller  competitors.  Many 
of  the  smaller  stores  are  forced  to  depend  very  largely  upon 
the  accommodation  of  jobbers  and  manufacturers. 1?  Smaller 
stores,  consequently,  through  higher  prices,  or  directly,  pay 
an  interest  rate  on  the  credit  they  receive  which  is  much  higher 
than  that  paid  by  the  larger  firms.  The  money  which  a  -de- 
partment store  can  borrow  on  its  short  time  notes  at  from 
4%  to  6  or  7  per  cent  may  result  in  a  discount  on  the  product 
it  buys  of  from  10  to  20  per  cent  or  even  more — reckoned  on 
an  annual  basis.  Manufacturers  in  particular  are  willing  to 
give  very  large  discounts  in  order  to  turn  their  stock  into 

"The  three  most  striking  features  of  the  large  department  stores' 
buying  methods  which  differentiate  them  from  the  regular  retail  outlet 
of  former  days  are  (1)  the  stock  plan,  (2)  the  seasonal  calendar,  and 
(3)  the  development  of  "sources."  See  Cherington,  The  Wool  Industry, 
pp.  228-234,  also  Clifton  C.  Field,  Retail  Buying,  Chap.  IV. 

18  "It  is  the  opinion  of  many  authorities  closely  connected  with  the 
department  store  system  that  it  is  a  common  error  to  think  that  the 
strength  of  the  department  store  is  based  on  the  advantages  it  offers 
the  purchasing  public,  for  those  advantages  are  merely  effects,  not 
causes.  The  fundamental  strength  of  the  department  store  lies  in  the 
advantages  it  offers  to  those  from  whom  it  buys  goods  and  from  whom 
it  buys  money  to  buy  goods.  It  sells  well,  and  is  able  to  give  elaborate 
service  to  its  customers,  because  it  buys  well." — Wm.  Cooke  Daniels, 
The  Department  Store  System  (1900). 


214  PRINCIPLES  OF  MARKETING 

immediate  cash.  Because  their  purchases  are  so  large  and 
so  important  to  manufacturers,  these  large  stores  can  get  better 
prices  than  do  small  competing  stores;  sometimes  they  pay 
lower  prices  than  do  the  jobbers  themselves.14 

The  purchase  of  goods  at  "inside"  prices  is  not  looked  upon 
with  favor  by  many  merchants  because  it  smacks  of  unfair 
competition  and  monopoly,  but  it  appears,  nevertheless,  to  be 
a  factor  in  the  market  and  is  another  aid  to  the  large  buyer 
who  uses  it.  Inside  prices  and  similar  practices  take  some 
of  the  following  forms.  The  buyer  may  be  given  larger  dis- 
counts for  quantity  buying  than  are  usually  offered  to  the 
trade.  He  is  given  these  for  a  variety  of  reasons:  to  get  rid 
of  a  surplus  stock,  to  gain  his  future  trade,  or  because  of 
the  large  volume  which  he  agrees  to  take  at  the  lowered  price. 
Extra  services  or  additional  goods  may  be  "thrown  in,"  or  the 
bill  may  be  dated  several  weeks  or  months  ahead,  the  usual 
terms  applying  from  that  date  instead  of  from  the  actual  date 
of  sale  or  delivery.  Finally,  these  large  buyers,  in  constant 
touch  with  the  market,  can  often  pick  up  bargains  from  manu- 
facturers who  have  a  surplus,  or  from  jobbers  or  importers  who 
are  overstocked,  or  even  the  stocks  of  retail  stores  which  are 
in  difficulty.  Such  articles  may  be  of  standard  quality  or 
they  may  be  articles  which  will  offer  good  material  for  a  sale 
or  as  leaders. 

Superior  Buying  Ability  in  Choosing  Stock. — But  the  pur- 
chase of  goods  at  lowered  prices  is  not  the  only  advantage 
which  the  large  retailer  has  in  the  buying  field.  Price  is  but 
one  aspect  of  a  sale;  the  customer  also  demands  quality,  style, 
variety,  "newness";  and  in  these,  also,  the  large  firm  usually 

"The  justification  for  quantity  prices  has  been  outlined  as  follows: 
unit  manufacturing  and  distributing  costs  are  less  on  large  orders  and 
the  overhead  charges  on  each  transaction  are  less,  large  buyers  ordi- 
narily have  higher  credit,  cut  prices  are  an  incentive  to  buyers  to  order 
in  larger  quantities.  Some  of  the  arguments  for  and  against  the  policy 
will  be  found  in  System,  May,  1919,  pp.  850  ff.;  Printers'  Ink,  June  28, 
1917,  pp.  8S-92,  Aug.  17,  1916,  pp.  114  ff.,  Dec.  20,  1917,  pp.  8S-91. 


LARGE  SCALE  RETAILING  215 

has  an  advantage.  Its  buyers  are  constantly  in  touch  with 
the  market,  finding  out  the  latest  tendencies,  the  newest 
articles,  even  seeking  products  to  meet  as  yet  unfelt  consumer 
desires  which  they  have  sensed.  Some  large  stores  have  buy- 
ers, or  agents,  in  important  foreign  centers,  as  well  as  in  the 
important  domestic  markets,  who  are  buying  and  gaining  in- 
formation of  the  latest  styles  and  of  new  products. 

Integration. — A  final  advantage  of  large  scale  retailing  is 
the  integration  of  retailing  with  jobbing  and  even  with  manu- 
facturing. When  a  department  store,  a  mail  'order  house,  or 
a  chain  system  buys  directly  from  the  producer  it  is  doing  the 
work  which  the  jobbe^,  and  even  the  importer,  formerly  per- 
formed for  it;  that  is,  storing,  financing,  assembling.  Not 
only  is  this  true,  but  frequently,  at  least  in  the  case  of  depart- 
ment stores,  the  result  is  that  the  store  goes  into  the  wholesale 
business.  This  may  be  done  either  because^}!-  the  profits  to 
be  made  or  because  it  is  thereby"  enabled  to  sell  a  larger 
volume  of  products,  and  to  receive  jobbing,  or  greater  than 
jobbing,  discounts.  Furthermore,  by  entering  wholesaling,  the 
store  gets  into  closer  touch  with  the  ultimate  sources  of  the 
supj$y  of  merchandise. 

The  central  purchasing  department  of  a  chain  store  system 
amounts  to  a  typical  jobbing  organization,  performing  for  the 
separate  links  in  the  chain  the  identical  function  which  whole- 
sale houses  perform  for  their  competitors.15  But  large  retail 
firms  do  more  than  their  own  jobbing;  they  are  often  en- 
gaged to  some  extent  in  manufacture  and  even  in  agriculture. 
One  great  string  of  restaurants  has  its  own  dairy  farm,  and 
mail  order  houses  and  department  stores  frequently  own  or 
control  plants  manufacturing  some  of  the  products  they  sell. 

The  Extent  of  these  Advantages  Varies  as  Between 
Types. — The  extent  to  which  these  advantages  apply  varies 

15  In  the  case  of  cooperative  jobbing  as  carried  on  by  such  retail 
cooperative  organizations  as  the  American  Drug  Syndicate,  United  Drug 
Company  (Rexall  Stores),  and  the  Gerard  Grocery  Company  of  Phila- 
delphia, a  separate  jobbing  organization  is  controlled  by  the  retailers. 


216  PRINCIPLES  OF  MARKETING 

widely  as  between  the  different  types  of  large  retail  organi- 
zations. Some  of  them  are  not  exclusive  advantages  of  large 
retailing,  but  are  rather  the  marks  of  skilled  merchandising. 
The  integration  of  jobbing  with  retailing  and  the  advantages 
in  buying  are  characteristic  of  all  types  of  large  retail  or- 
ganizations. They  serve  also  as  a  chief  contrast  with  small 
retailing.  In  the  case  of  the  mail  order  house  and  the  chain 
store  and  of  the  low-price  department  store,  the  price  ad- 
vantage which  results  is  of  prime  importance,  whereas  the 
advantage  in  keeping  in  touch  with  the  latest  products  and 
styles  and  fashions  is  of  greater  importance  to  the  depart- 
ment stores  which  sell  to  the  more  exclusive  trade. 

The  advantages  of  specialization  by  departments  and  the 
economical  use  of  men  and  equipment  are  likewise  common 
to  each  type.  It  arises,  however,  from  their  very  nature  that 
more  departments  are  necessary  in  department  stores  and  in 
general  mail  order  houses  than  can  be  used  by  a  chain  of  unit 
stores  selling  in  a  single  field.  Rapid  turnover  is  particularly 
stressed  by  the  chain  stores,  especially  when  they  sell  on  a 
price  basis.  But  it  is,  of  course,  important  with  the  others. 
Necessary  variety,  freshness,  and  stylishness  of  merchandise 
are  perhaps  equally  important  to  chain  stores  and  mail  order 
houses,  but  they  are  of  the  greatest  importance  to  department 
stores. 

II 

Disadvantages. — The  disadvantages  of  large  scale  retailing 
can  be  more  briefly  stated.  But  they  should  not  for  that  rea- 
son be  under-estimated,  since  very  distinct  difficulties  con- 
front these  large  organizations.  The  first  of  these  is  the  great 
cost  of  doing  business.  In  order  to  carry  out  their  plans 
such  stores  musT  create  a  very  large  demand  for  their  services. 
Department  stores  and  mail  order  houses  particularly  must 
draw  their  clientele  from  a  wide  territory  separated  by  con- 
siderable distance  from  the  establishment  itself  and  hence 


LARGE  SCALE  RETAILING  217 

situated  in  markets  normally  tributary  to  other  dealers.16 
For  the  department  store  this  necessitates  an  enormous  ex- 
penditure for  advertising  and  service,  with  which  to  create  a 
sufficient  clientele.  To  the  mail  order  house  it  necessitates 
large  expense  for  correspondence  and  advertising,  particularly 
for  the  preparation,  printing,  and  mailing  of  expensive  cata- 
logues. Another  heavy  expense  of  the  mail  order  house  is  for 
the  transportation  of  shipments,  or  the  competitive  disad- 
vantage of  making  clients  pay  delivery  costs.  A  similar  cost 
to  the  department  store  is  the  delivery  expense.17 

Again,  large  organizations  must  depend  upon  hired  em- 
jDla^ees.  These  are  proverbial^  les$[.  efficient  in  theTJMVork^ 
less  cautious  in  management,^  leSs, -courteous  and  less  effective 
in  selling,  than  are  the  proprietors  of  smaller  shops.  Not  be- 
ing in  immediate  contact  with  those  most  interested  in  the 
welfare  of  the  organization,  the  incentive  to  efficient  service 
is  peculiarly  lacking.  Careful  training,  high  salaries,  and  ex- 
pensive systems  of  accounting,  supervision,  and  control  seem 
to  be  the  only  means  of  offsetting  this  disadvantage. 

Finally,  there  is  lacking  in  the  large  store  that  friendly 
feeling  which  usually  exists  between  the  proprietor  of  the 
small  store  and  his  customers.  The  general  absence  of  a  feel- 
ing of  friendliness  towards  large  corporations  undoubtedly  has 

18  The  following  suggestive  data  purport  to  show  the  relative  "cost  of 
getting  trade,"  which  includes  normal  kinds  of  retail  advertising  costs, 
such  as  letters,  c^alogues,  window  decorating,  newspaper  space  (as 
shown  in  an^rticl^lby  Wheeler  Sammons,  "The  Cost  of  Getting  Trade," 

in  Sy^ten^y'fl  XXV  -[June,  f$J4],  p.  585).                    f      .             .. 
V               * 

Groceries    83  per  cent      Drugs   1.76  per  cent 

Hardware    1.17   "      "         Clothing    2.16  "  " 

Vehicles   and    Imple-  Furniture    2.72  "  " 

ments   1.22   "      "         Jewelry    2.85  "  " 

Variety  Goods  1.52  "      "  Department   Stores..  4.01  "  " 

Shoes    1.65  "      "  Mail  Order  House. ..  721  "  " 

Dry  Goods  1.67   "      « 

17  Figures  compiled  by  the  Bureau  of  Research  and  Information  of  the 
National  Retail  Dry  Goods  Association  show  delivery  costs  ranging 
from  nine  to  twenty  cents  per  package. in  1919. 


218  PRINCIPLES  OF  MARKETING 

its  effect  in  causing  customers  to  prefer  small  dealers  or  to 
impose  on  the  large  firm  if  they  do  patronize  it.  It  is  im- 
probable that  a  small  store  should  have  purchases  returned 
amounting  to  30  per  cent  of  charge  sales,  a  condition  found 
to  exist  in  a  large  eastern  store  in  1917,  or  even  12  to  20 
per  cent,  a  more  common  situation  with  Boston  and  New 
York  department  stores.18 

In  the  remainder  of  the  chapter  certain  individual  charac- 
teristics of  the  department  store,  mail  order  house,  and  chain 
store  will  be  emphasized. 

Ill 

A.  The  Department  Store. — The  department  store  is  a 
retail  establishment  which  sells  a  variety  of  goods,  and  in 
which  the  merchandise  is  divided  into  classes — each  one  of 
which  is  handled  in  a  department  which  is  distinct  as  to  man- 
agement and  location  within  the  store,  and  which  is  carried 
in  the  accounts  as  a  separate  entity.  Almost  unknown  only 
a  half  century  ago  the  origin  of  the  department  store  is,  never- 
theless, uncertain.19  The  most  probable  explanation  is  that 
it  was  a  natural  outgrowth  from  the  dry  goods  store.  It  is 
known  that  many  recent  establishments  started  in  this  way. 

18  "In  few  of  the  large  stores  were  returns  less  than  12  per  cent  of 
gross  sales,  while  15-20  per  cent  was  not  uncommon." — Economy  in  Re- 
tail Service,  1918,  published  by  the  Commercial  Economy  Board  of  the 
Council  of  National  Defense,  p.  7.  The  Retail  Research  Association, 
225  Fifth  Avenue,  New  York,  found  returns  in  large  department  stores 
in  1921  averaged  about  10  per  cent  of  sales,  and  the  National  Retail 
Dry  Goods  Association,  200  Fifth  Avenue,  New  York,  in  an  extensive 
investigation  made  in  1921,  found  that  returns  averaged  8  per  cent  of 
sales.  The  detailed  figures  for  1920  are:  average  per  cent  of  returns  to 
total  sales,  7.8  per  cent,  to  charge  sales  13.5  per  cent,  to  C.  0.  D.  sales 
13.45  per  cent. 

"Alfred  Marshall  believes  that  the  first  true  department  stores  arose 
in  France,  the  "Bon  Marche"  and  the  "Louvre"  established  about  1852. 
These  in  turn,  he  believes,  received  their  inspiration  from  English 
cooperative  experience.  But  the  greatest  development  has  occurred  in 
the  United  States.  See  Alfred  Marshall,  Industry  and  Trade,  pp.  295-6. 


LARGE  SCALE  RETAILING  219 

As  the  margin  on  textiles  became  less  and  less  with  increasing 
competition  in  the  retail  field,  the  owners  of  dry  goods  stores 
naturally  turned  to  women's  factory-made  clothing,  notions, 
and  other  articles  related  to  their  trade  which  the  development 
of  manufactures  had  brought  on  the  market.  From  each  new 
article  it  was  but  a  step  to  the  next,  until  convenience  in 
handling  and  the  necessities  of  management  must  have  led 
to  departmentization.  Then,  with  departmentization  estab- 
lished and  the  idea  in  mind,  extension  into  other  fields  than 
dry  goods  and  related  products  naturally  followed.  To-day 
the  department  store  tends  to  supply  all  the  needs  of  its 
customers.  In  1913  there  were  1,140  department  stores  in 
this  country,  the  average  annual  sales  of  each  amounting  to 
more  than  $200,000.20  Several  of  these  were  doing  a  business 
of  over  $10,000,000  and  one  had  a  business  of  $35,000,000. 
In  1920  Marshall  Field  and  Company  did  a  $65,000,000  busi- 
ness, Carson  Pirie  Scott  and  Company  did  a  $50,000,000  busi- 
ness and  nine  other  stores  in  New  York,  Philadelphia,  and 
Chicago  are  reported  as  having  done  a  business  of  $20,000,000 
or  more. 

Advantages :  Conveniences  to  Shoppers. — Compared  with 
the  unit  store,  its  most  direct  competitor,  the  department  store 
offers  important  conveniences  to  its  customers.  It  is  pre- 
eminently the  shopping  store.  In  fact  it  has  drawn  to  itself 
so  much  of  the  shopping  trade — trade  which  involves  the  care- 
ful comparison  of  style,  quality,  and  price — that  smaller  com- 
peting dry  goods  stores,  in  particular,  have  almost  abandoned 
that  trade  and  have  confined  themselves  to  selling  convenience 
goods.  With  its  many  lines  under  one  roof  the  shopper  can 
complete  her  purchases  without  leaving  the  store.  It  is  lo- 
cated in  a  central  retail  district,  often  in  a  beautiful  struc- 
ture, where  the  shopper  trades  among  pleasant  surroundings. 
Among  the  conveniences  within  the  store  itself  are  rest  rooms, 
lunch  rooms,  tea  rooms,  and  writing  rooms — all  designed  to 

20  C.  C.  Parlin,  The  Merchandising  of  Textiles  (The  National  Whole- 
sale Dry  Goods  Association,  1913),  p.  26. 


220  PRINCIPLES  OF  MARKETING 

induce  the  customer  to  come  into  the  store  and  remain  to 
complete  the  shopping.  Some  of  these  services  are  free  and 
those  for  which  charges  are  made,  such  as  the  lunch  service, 
are  not  believed  to  be  important  profit-making  ventures.  Other 
services  not  confined  to  department  stores,  but  which  have 
been  developed  by  them  to  a  high  degree,  are  deliveries,  the 
grant  of  credit  and  with  it  the  convenience  of  having  all 
purchases  on  one  bill,  and  the  privilege  of  trial  and  return  of 
goods. 

The  mere  size  of  the  department  store  has  an  effect  upon 
the  buying  public.21  Big  stores  have  usually  a  reputation 
for  reliability.  The  store  building  may  even  be  said  to  serve 
as  a  symbol  about  which  the  firm's  good  will  can  be  built. 

But  even  with  these  advantages  and  the  other  advantages 
of  large  scale  retailing  previously  mentioned  to  assist  it,  the 
department  store  has  by  no  means  an  easy  time  and  its 
smaller  competitors,  particularly  the  city  specialty  shops,  con- 
tinue to  thrive. 

High  Expense. — The  cost  of  operation  is  very  large. 
It  has  been  estimated  from  time  to  time  to  range  from  24  to 
31  per  cent  of  sales.22  This  is  higher  than  similar  estimates 
for  either  chain  stores  or  mail  order  houses.  Comparisons 
with  competing  unit  stores,  although  more 'pertinent,  are  diffi- 
cult to  make.  The  general  statement  that  department  store 
costs  are  higher,  however,  seems  warranted  from  the  facts 
available.  Rents,  advertising,  and  delivery  expenses  are  usu- 

21  "Big  business  appeals  to  the  imagination  of  the  people  of  the  twen- 
tieth century,  especially  to  the  people  of  the  middle  and  lower  classes. 
The  big  store  suggests  class  and  distinction.    To  trade  there  to  a  cer- 
tain extent  confers  distinction.    The   big  store's  automobile   delivery 
truck  calling  at  one's  residence  heightens  this  effect." — Nystrom,  Eco- 
nomics of  Retailing  (2d  ed.,  1919),  p.  261. 

22  The   National  Retail   Research  Association  estimates  it  to  be  25 
to  30  per  cent  of  sales,  the  National  Retail  Dry  Goods  Association, 
28  to  31  per  cent,  and  an  investigation  of  266  department  stores  recently 
made  by  the  Harvard  Bureau  of  Business  Research  finds  their  average 
expense  is  27.8  per  cent  of  sales,  and  net  profit  1.8  per  cent. 


LARGE  SCALE  RETAILING  221 

ally  assumed  to  be  higher  for  department  stores  than  for 
competing  unit  stores.  But  convincing  data  are  yet  to  be 
secured,  for  although  these  items  are  individually  large,  the 
amounts  are  divided  over  very  large  volumes  of  trade,  which 
tends  to  lessen  the  unit  charge.  And  if  the  volume  of  business 
resulting  from  the  preferred  location,  advertising,  and  delivery 
service  is  great  enough,  the  unit  cost 23  will  become  very  low. 
Furthermore,  even  large  unit  costs  are  not  a  positive  disad- 
vantage if  they  are  offset  by,  or  are  the  means  of  securing, 
a  sufficiently  rapid  turnover. 

It  is  popularly  assumed  that  the  high  rentals  paid  in  the 
preferred  locations  necessitate  a  higher  unit  cost  for  rent. 
Stores  otherwise  located  sometimes  make  much  of  this  in  their 
advertising.  The  explanation  of  rent  to  which  economists  gen- 
erally adhere  would  indicate,  on  the  other  hand,  that  the 
larger  volume  of  business  done  in  such  locations  offsets  the 
increased  rent.  Marshall  even  goes  so  far  as  to  state  that 
there  is  a  saving  to  the  large  store  "especially  in  ground 
rent:  for  a  single  first-rate  frontage  on  a  good  thoroughfare 
serves  as  an  introduction  to  many  acres  of  flooring.  .  .  . " 24 
Data  gathered  concerning  men's  retail  clothing  stores  seem 
to  show  that  rents  are  less  per  $100  of  sales  in  the  better 
locations;  at  least,  less  for  large  stores  than  for  small.25  From 
a  competitive  point  of  view  one  other  point  has  an  important 
bearing  here.  Many  department  stores  own  their  ground 
space  and  so  pay  no  ground  rent  to  outside  parties.  If  an 
increased  rental  is  charged  when  such  land  increases  in  value, 

it  is  simply  an  accounting  expense.    It  does  not  have  to  be 
%  *i  ,**•* 

23  That  is,  costs  per  unit  of  sales — usually  expressed  as  a  certain  per 
cent  per  dollar  of  sales. 

"Alfred  Marshall,  Industry  and  Trade,  p.  297.  On  the  other  hand, 
Nystrom  introduces  an  interesting  theory  to  the  effect  that  future 
values  are  discounted  and  a  part  of  the  profit  of  superior  manage- 
ment is  taken  by  the  landlord.  See  his  Economics  of  Retailing, 
Chap.  XI. 

25  Northwestern  University  Bureau  of  Business  Research,  The  Cloth- 
ing Survey,  p.  121. 


222  PRINCIPLES  OF  MARKETING 

paid.  This  is  an  important  competitive  advantage  in  case 
of  need. 

There  is  less  reason  to  doubt  that  advertising  and  delivery 
are  relatively  high  expenses  for  department  stores.  The  crea- 
tion of  demand  among  prospects  in  outlying  districts  involves 
an  enormous  expense  for  advertising,  and  the  delivery  of  goods 
to  such  customers  is  likewise  costly.26  Even  here  comparative 
data  are  not  convincing.  The  department  store  is  competing 
with  many  kinds  of  stores  in  varying  locations,  and  the  data 
gathered  so  far  are  relatively  meagre.27 

Departmentization  itself,  while  bringing  economy  in  the 
time  of  some  employees,  causes  waste  in  the  time  of  others. 
Thus,  there  are  certain  to  be  slack  times  in  the  work  of  many 
clerks  and  helpers  in  the  various  departments,  whereas  these 
same  employees  in  a  unit  shop,  when  not  selling  one  thing 
could  be  selling  another  or  could  be  performing  other  neces- 
sary duties.  The  delivery  boy  or  the  proprietor's  wife  help 
sell  when  there  is  a  rush,  or  the  clerk  helps  to  deliver,  take 
inventory,  and  keep  the  books.  To  offset  this,  to  what  de- 
gree it  is  impossible  to  determine,  some  employees  in  the  larger 
stores  are  trained  to  work  in  several  departments  as  need 
arises. 

Personnel  Problems. — Again,  as  this  type  of  establishment 
caters  to  the  shopping  trade,28  it  is  very  susceptible  to  losses 

28 Competing  unit  stores  usually  deliver  in  a  smaller  area;  if  they 
catered  to  customers  in  as  wide  a  territory  as  does  the  department 
store  their  delivery  expense  per  sale  would,  of  course,  be  greater  because, 
whereas  they  confine  their  service  to  one  line  of  goods,  the  department 
store  sells  and  delivers  many  lines. 

27  The  Harvard  University  Bureau  of  Business  Research  has  announced 
an  investigation  of  department  stores.  The  fact  that  savings  in  adver- 
tising expense  are  sometimes  given  as  an  advantage  of  department  stores 
shows  how  meagre  and  inconclusive  the  data  are.  See  pp.  209-210. 

38 " Woman's  purchases  are  of  two  distinct  classes.  .  .  .  These  two 
classes  we  call  'convenience  goods'  and  'shopping  lines.'  Convenience 
goods  comprise  notions,  cottons  under  15$  a  yard,  stockings  for  the 
children,  and  in  general,  the  lower  end  of  woman's  purchases.  An  in- 
ventory of  a  suburban  dry  goods  shop  will  furnish  a  complete  list  of 


LARGE  SCALE  RETAILING  223 

through  poor  salesmanship.  This  difficulty  is  greater  with  the 
department  store  than  it  is  with  the  chain  store,  which  caters 
more  largely  to  convenience  goods,  or  the  mail  order  house, 
in  which  the  personality  of  the  employees  is  not  in  evidence. 
The  importance  of  a  well-trained  sales  force  is  now  recognized. 
And  the  recognition  of  this  need  has  forced  the  payment  of 
better  wages  and  the  development  of  systems  for  training 
and  arousing  the  initiative  of  salespeople.  But  hired  sales- 
people, even  with  the  best  of  training  and  the  greatest  of 
incentives,  seldom  have  the  interest,  tact,  and  courtesy  of  the 
unit  store  owner  or  of  his  clerks — who  are  working  always 
under  his  watchful  eye  and  with  a  more  direct  personal  knowl- 
edge of  the  firm  itself  and  a  more  personal  interest  in  its 
success. 

Finally,  the  very  size  of  the  business  and  the  diversity  of 
goods  it  carries  and  of  services  it  performs  make  it  peculiarly 
liable  to  excessive  expense  and  to  unforeseen  losses.  To  coun- 
teract these  risks  it  is  necessary  to  build  up  expensive  store 
systems  for  supervision,  accounting,  statistical  service,  and  the 
training  of  employees.  A  "system"  is  frequently  necessary 
in  order  to  keep  track  of  and  to  guide  activities  which  in 
smaller  stores  and  stores  with  less  diverse  activities  are  under 
the  immediate  attention  of  the  owner  of  the  store. 

B.   The  Large  Mail  Order  House. — The  great  mail  order 

convenience  goods.  These  lines  are  bought  under  the  same  influences 
that  affect  men:  (1)  at  a  convenient  store,  or  (2)  by  impulse,  or  (3)  at 
an  accustomed  place,  or  (4)  by  brand.  There  is  little  or  no  comparison 
of  values. 

"Shopping  lines  in  general  comprise  the  upper  end  of  woman's  pur- 
chases— cloaks  and  suits,  carpets,  millinery,  the  better  grades  of  hosiery 
and  underwear,  and  all  those  articles  which  a  woman  records  on  her 
mental  shopping  tablet  (which  never  forgets),  and  of  which  she  defers 
the  purchase  until  a  trip  to  her  shopping  center.  In  these  lines  a 
woman  does  want  to  compare  values.  She  wants  to  go  to  one  store, 
then  to  a  second,  then  to  a  third,  and  after  having  seen  three  stocks,  to 
make  her  choice,  by  comparing  quality,  price  and  style." — C.  C.  Parlin, 
Merchandising  of  Textiles,  pp.  5-6. 


224  PRINCIPLES  OF  MARKETING 

house  is  a  unique  American  institution.  Although  business 
has  been  done  at  retail  through  the  mails  perhaps  since  the 
establishment  of  the  post,  this  particular  development  dates 
only  from  the  establishment  of  Montgomery  Ward  and  Com- 
pany in  1872.29  Although  the  mail  order  business  is  discussed 
here  as  a  type  of  large  scale  retailing,  its  method  is  not  con- 
fined to  large  firms  nor  to  retailing.  Some  jobbing  houses 
sell  entirely  or  in  large  part  by  mail,  and  most  jobbing  houses 
stimulate  mail  orders  between  calls  of  their  salesmen.  Many 
department  stores  carry  on  a  more  or  less  extensive,  although 
not  always  successful  and  profitable,  mail  order  business,  as 
do  many  specialty  stores  and  some  chains.30  Many  manu- 
facturers attempt  to  sell  by  mail  to  the  ultimate  consumers 
either  all  or  a  part  of  their  output,  and  finally,  much  inter- 
national trade  is  carried  on  through  mail  order  methods. 

Nystrom  estimates  that  perhaps  a  billion  dollar  retail  busi- 
ness is  carried  on  annually  through  the  mails.31  The  busi- 
ness of  the  two  great  Chicago  houses  (Sears,  Roebuck  &  Com- 
pany and  Montgomery  Ward  &  Company)  alone  amounted  to 
approximately  $360,000,000  in  1920.  The  larger  of  these, 
Sears,  Roebuck  &  Company,  had  8,000,000  names  on  its  mail- 
ing list.  Probably  something  over  10,000,000  people  in  the 
United  States  are  regular  customers  of  these  two  houses.32 

29  M.  T.  Copeland  in  his  The  Cotton  Manufacturing  Industry  of  the 
United  States,  in  speaking  of  the  cloth  merchants  of  the  nineteenth 
century  states  (p.  194)  that  "they  had  agents  in  various  cities  to  whom 
they  consigned  goods,  and  they  also  solicited  orders  by  post  through 
advertisements  in  the   newspapers   of  the   different   cities."    Although 
such  sales  were  probably  at  wholesale  it  shows  that  the  method  is  not 
new. 

30  See  Printers'  Ink,  May  20,  1915,  p.  70,  "Kresge  Chain  Reaching  Out 
for  Business  by  Mail."    Many  retail  store  managers  who  attack  the  great 
mail   order  houses  for  their  methods  are   themselves  extending  their 
business  through  the  mails  to  the  customers  of  smaller  stores  in  near-by 
towns. 

31  Nystrom,  Economics  of  Retailing  (2d  ed.,  1919),  p.  291. 

32  "There  are  over  2,500  mail-order  houses  in  all  in  this  country.    Of 
this  number  850  are  rated  at  over  $100,000."    Ibid.,  p.  290. 


LARGE  SCALE  RETAILING  225 

Many  of  these  order  most  of  their  products  from  local  stores, 
but  the  figures  given  are  nevertheless  indicative  of  the  im- 
portance of  this  type  of  business. 

Its  Rise. — The  reasons  for  the  inception  of  the  mail  order 
business  in  this  country  have  been  well  summarized  as  arising 
from 

"the  independence  and  lack  of  community  spirit  of  the  American 
countryman  due  largely  to  his  isolated  manner  of  living,  the  gen- 
eral circulation  of  periodical  literature  among  all  classes  of  people, 
the  increased  earning  power  of  many  classes,  the  rising  standards 
of  living,  the  backwardness  of  many  small-town  merchants,  the 
power  of  mail-order  advertising  to  create  demands  for  mail-order 
house  goods,  and  the  cheaper  price  argument."  8 

Methods. — Most  of  the  methods  of  the  large  mail  order 
house  are  similar  to  the  methods  of  other  large  retail  organi- 
zations. They  are  in  particular  similar  to  department  store 
methods.  But  whereas  the  latter  must  draw  customers  to 
the  store  and  depend  upon  display,  advertising,  and  pejsonal 
salesmanship  Jjo  create  ^demand,  the  mail  order  house  depends 
upon  advertising  alon^  The  sole  method  of  demand  creation 
is  through  advertising 34  and,  of  course,  the  satisfaction  de- 
rived from  the  goods  and  ^services  it  ^sells.  Mail  order  ad- 
vertising consists^of  newspaper  and  magazine  advertisements, 
catalogues',  circulars,  and  letters.  The  advertisements  and  let- 
ters of  the  better  houses  are  unusually  well  composed,  truth- 
ful, and  courteous  as  well  as  convincing  in  their  appeal.  Many 
retail  stores  could  learn  useful  lessons  in  accurate  and  illu- 
minating description  of  merchandise,  and  in  prompt,  courteous 
treatment  of  customers,  from  the  advertising  and  correspond- 
ence of  the  large  mail  order  houses. 

Although  lacking  the  personal  appeal  and  the  element  of 
»  * 

**Ny  strom,  op.  cit.,  p.  295. 

34  That  is,  the  mail  order  business  depends  on  advertising,  but  some 
mail  order  houses  have  departments  which  sell  by  ordinary  retail 
methods.  Montgomery  Ward  &  Company  and  Harris  Brothers  Com- 
pany, for  example,  have  retail  sales  rooms  in  their  Chicago  plants. 


226  PRINCIPLES  OF  MARKETING 

good  will  inhering  in  the  ordinary  retail  store,  the  catalogue 
of  the  mail  order  house  offers,  nevertheless,  many  advantages 
in  selling.  Aside  from  the  features  previously  discussed,  it 
is  available  for  immediate  reference,  and  can  be  perused  at 
leisure.  Few  people  are  willing  to  take  the  time  during  busi- 
ness hours  to  go  over  the  entire  stock  of  the  retailer's  store, 
and  few  retailers  would  allow  them  to  do  so,  but  the  goods 
of  the  mail  order  house  are  always  at  hand  through  their 
catalogue  for  what  approximates  just  such  inspection. 

Cash  Sales. — Another  feature,  which,  although  not  confined 
to  mail  order  business,  has  until  recently  been  an  almost 
universal  characteristic  of  their  trade,  is  the  sale  of  goods  for 
cash.  In  recent  years  this  policy  has  been  modified  by  some 
houses  in  those  sales  in  which  large  amounts  are  spent  for  a 
single  item,  such  as  a  piano  or  a  cream  separator.  It  was 
found  that  these  goods  would  not  sell  without  this  arrangement, 
the  original  investment  being  too  great  for  the  average  cus- 
tomer.35 Another  important  policy  is  that  which  guarantees 
the  goods  to  give  satisfaction.  This,  again,  is  not  confined 
to  the  mail  order  business,  but  because  of  the  distance  of 
customers  from  the  house,  and  the  demand  for  cash  with  or- 
ders, it  is  undoubtedly  an  essential  element  in  getting  and 
retaining  business.  Many  a  customer  has  been  kept  and  many 
a  new  one  made  through  the  policy  of  some  of  these  houses 
in  allowing  goods  to  be  returned  at  their  own  expense  and  in 
cheerfully  refunding  the  purchase  price  of  the  article. 

Two  Greatest  Advantages. — The  two  greatest  advantages 
of  the  mail  order  house  over  its  strongest  competitor — the 
country  store — are  (1)  the  great  variety  of  goods  carried,  and 
(2)  superior  buying.  The  country  store  finds  it  impossible 
to  carry  the  different  kinds  of  goods  or  the  varieties  and  styles 

85  Sears,  Roebuck  &  Company's  annual  report  for  1920  showed  a 
little  over  $47,000,000  in  accounts  receivable,  out  of  a  total  business  of 
over  $230,000,000.  These  credits  were  mainly  for  the  sale  of  home 
building  materials,  phonographs,  and  encyclopedias  sold  on  a  time  pay- 
ment basis. 


LARGE  SCALE  RETAILING  227 

and  sizes  which  consumers  demand.  Although  such  goods 
can  be  ordered  on  special  request  many  dealers  are  not  ac- 
commodating in  this  regard,  and  customers  commonly  prefer  to 
order  for  themselves  rather  than  allow  the  dealer  to  order  for 
them.36  The  mail  order  house  not  only  carries  the  goods 
usually  demanded  but  through  its  advertising  creates  demand 
for  other  merchandise. 

Superior  buying  makes  possible  a  properly  assorted  stock 
and  assures  that  low  prices  will  be  paid  for  goods  bought. 
The  reasons  for  this  superior  buying  are  the  same  as  those 
which  inhere  in  all  large  retail  organizations.  But  they  are 
probably  realized  in  greater  degree,  for  the  volume  of  busi- 
ness done  by  the  large  mail  order  house  is  greater  than  that 
of  department  stores  or  chain  stores.37  The  advantage  re- 
sulting from  the  great  buying  power  of  the  firm  is  perhaps 
the  chief  factor  in  the  low  price  appeal  which  such  organi- 
zations can  make.  That  some  articles  are  sold  by  the  mail 
order  houses  at  lower  prices  than  competing  retail  organiza- 
tions sell  them  is  beyond  dispute;  that  most  of  their  sales  are 
made  on  this  basis  is  not  so  evident,  particularly  when  the 
cost  of  delivery,  usually  paid  by  the  customer,  is  considered.38 
That  they  sell  at  generally  lower  prices  than  competing  stores 
is  not  proved  to  the  satisfaction  of  all;  but  that  they  com- 
pete successfully  by  using  a  price  appeal  cannot  be  ques- 
tioned. The  larger  houses  seem  to  have  a  real  advantage  in 

88  The  liberal  attitude  of  the  mail  order  ^ouse  toward  returns  may  be 
partly  responsible  ,for  this,  for  whenv  small  dealer^  make  special  orders 
t^ey  expect.. the  customer-  tetake  tne*  goods.  •  »  ^  *•'' 

37  The"  largest  sales  f 8r»  any   department   store   in   l'917  were   under 
$50,000,000,  whereas  the  sales  of  two  mail  order  houses  in  that  year 
were  greater  than  this  by  over  three  times.    See  p.  224. 

38  Bulky   articles   need   not   be   carried   in   stock.    Consumers   expect 
some  time  to  elapse  before  receiving  such  articles  by  freight  and  so  the 
mail  order  house  utilizes  the  drop  shipment  method  of  the  jobber  and 
has  the  articles  shipped  directly  from  the  factory  at  which  they  are 
made,  or  from  its  own  district  warehouses.     Furniture  and  heavy  hard- 
waic,  m  particular,  can  be  handled  in  this  way. 


228  PRINCIPLES  OF  MARKETING 

this  regard  if  they  wish  to  use  it.39  But  it  must  be  remem- 
bered that  price  is  only  one  strong  appeal  of  such  houses: 
variety  of  goods  guaranteed  to  give  satisfaction,  the  ease  of 
ordering  from  a  catalogue  and  on  the  negative  side,  the  in- 
efficiency of  small  competing  stores,  all  have  a  powerful  influ- 
ence favoring  the  great  mail  order  house. 

Systems. — Highly  systematized  methods  of  filing  orders 
and  filling  them  have  been  developed  in  the  larger  houses 
so  that  orders  can  be  assembled,  packed,  and  shipped  with 
a  minimum  of  cost  and  the  maximum  of  speed.  One  large 
Chicago  concern  has  its  work  so  well  in  hand  that  all  orders 
are  through  the  house  in  twenty-four  hours.  The  goods  in  a 
single  order,  which  must  come  from  various  departments,  are 
scheduled  to  reach  the  packing  room  at  a  certain  definite 
time,  with  an  allowance  of  but  ten  minutes.  Orders  may  ar- 
rive one  Wour  early,  but  they  are  sorted  in  ten  minute  periods. 

Disadvantages. — Among  the  disadvantages  under  which 
mail  order  establishments  work  is  the  high  cjosk-oiLclemand 
creation  which  results  from  the  necessity  of  utilizing  such  an 
^enormous  amount  of  advertising.  The  few  figures  that  are 
available  seem  to  indicate  that  even  excluding  the  cost  to  the 
customers  for  delivery  the  expense  of  doing  business  in  mail 
order  houses  is  as  great  as  is  that  in  competing  stores  if  not 
greater.40  For  although  there  are  economies  in  clerk  hire 
and  at  other  points,  resulting  from  the  wonderful  systema- 
tization  of  the  business  and  the  efficient  methods  and  appliances 

39  With  regard  to  this  low  price  appeal  it  must  not  be  forgotten  that 
a  good  deal  of  mail  order  business  is  carried  on  by  relatively  small  firms, 
which  do  not  have  any  of  the  advantages  of  large  scale  business  and  so 
probably  labor  under  the  disadvantages  of  mail  order  business  without 
its  compensating  advantages  of  variety  of  goods  and  great  purchasing 
power. 

40  Nystrom  estimates  that  the  average  cost  of  doing  business  in  large 
mail  order  houses  is  about  22  per  cent  of  sale,  ranging  from  18  to  26 
per  cent.    Investigations  in  ordinary  retail  store  business  have  given 
figures  ranging  from  10  to  27  per  cent  for  rural  stores,  the  chief  com- 
petitors.   See  Nystrom,  op.  cit.,  pp.  65-67,  305-306;  also  Curtis  Publish- 
ing Company,  Selling  Forces,  pp.  178-179. 


LARGE  SCALE  RETAILING  229 

utilized,  their  cost  of  demand  creation,  e.  g.,  the  cost  of  print- 
ing and  mailing  catalogues,  is  very  large.  Unlike  the  local  re- 
tail stores  their  clientele  is  not  located  in  the  neighborhood  and 
so  it  is  not  naturally  convenient  to  trade  there,  and  neither 
does  it  comes  under  the  personal  influence  of  the  proprietor 
or  his  subordinates.  Hence  such  an  establishment  must  be 
continually  advertising  to  sustain  and  increase  its  business, 
and  it  must  take  great  pains  to  keep  the  good  will  of  cus- 
tomers.41 

The  mail  order  business  is  closely  tied  up  with  one  class  of 


hrmsp  prospers,  Hit  T^on-*-bp  farmer  is  unaGle  to  buy, 
the  business  of  the  mail  order  house  suffers  a  great  decline. 

In  times  of  rapidly  changing  prices,  the  fact  that  prices 
as  published  in  the  catalogue  will  prevail  until  another  is  pub- 
lished may  involve  the  company  in  great  loss  of  trade  or 
money.  When  prices  are  rising,  many  orders  will  be  filled  at 
a  higher  cost  than  was  anticipated  when  the  goods  were  priced. 
This  will  be  true  unless  they  have  been  purchased  at  lower 
prices,  or  unless  the  order  for  the  higher  cost  goods  is  not 
filled.  When  prices  are  falling  rapidly  the  catalogue  prices  are 
often  higher  than  are  those  in  competing  stores. 

Transportation  costs  to  customers  are  a  disadvantage  in 
this  kind  of  business  which  cannot  be  overlooked.  Even  if 
they  are  not  borne  by  the  house  they  add  to  the  customer's 
cost  —  although  it  is  claimed  that  he  often  fails  to  consider 
this.42  Deliveries,  moreover,  are  necessarily  slow,  compared 
to  the  convenient  and  immediate  delivery  from  the  local 
store.  The  cost  and  time  of  shipment  from  Chicago  to  remote 
places  have  been  responsible  for  the  establishment  of  branch 
houses  in  various  parts  of  the  country. 

41  See  Printers'  Ink,  July  19,  1917,  p.  8. 

42  In  cities  and  in  towns  mail  order  houses  have  begun  to  lower  trans- 
portation costs  by  sending  a  number  of  orders  in  a  single  car  once  in 
two  or  three  weeks.    This  carload  consigned  to  a  drayman  is  then  dis- 
tributed by  him.     In  this  way  both  railroad  and  dray  costs  are  reduced, 
and  deliveries  are  speeded  up. 


230  PRINCIPLES  OF  MARKETING 

Goods  are  not  seen  by  the  buyer  before  they  are  purchased. 
No  matter  how  generous  a  concern  may  be  with  its  guaran- 
tees of  satisfaction  many  customers  do  not  like  the  necessity 
of  returning  goods,  nor  of  waiting  several  days  for  them 
only  to  find  that  they  are  not  what  are  wanted,  or  that  a  part 
of  the  order  was  not  filled.  The  best  houses  through  the  ex- 
cellent descriptions  of  their  goods  have  gone  far  in  eliminating 
this  difficulty.  But  there  are  many  things  which  it  is  difficult 
to  describe  accurately,  and  even  with  the  best  of  descriptions 
and  of  intentions  the  purchaser  may  yet  be  led  astray  or  left 
uncertain. 

Finally,  in  addition  to  the  great  difficulty  in  getting  the 
good  will  of  customers  and  the  lack  of  the  personal  service 
so  many  customers  desire,  the  volume  of  mail  order  business 
has  undoubtedly  been  curtailed  by  the  appeal  of  local  mer- 
chants to  community  pride.  The  sneer  of  the  local  merchant 
at  the  mail  order  customer  and  the  slogan  "buy  at  home"  have 
kept  many  an  order  from  finding  its  way  to  the  distant  mail 
order  house.  The  mail  order  houses  are  meeting  with  new 
selling  problems  in  recent  years  which  have  made  many  ques- 
tion their  future.  The  introduction  of  the  automobile  enables 
farmers  to  go  to  near-by  towns  and  cities  with  greater  ease, 
and  so  at  the  same  time  it  is  sounding  the  doom  of  many 
country  stores  the  automobile  is  also  having  an  adverse  effect 
on  mail  order  business.  The  introduction  of  the  chain  store 
into  smaller  towns  and  cities  seems  also  to  be  making  great 
inroads  upon  mail  order  business.  Because  of  their  ability 
to  sell  at  prices  which  are  as  low  or  lower  than  mail  order 
prices  they  obtain  much  of  the  trade  which  formerly  went  to 
the  mail  order  houses. 

C.  The  Chain  Store. — A  chain  store  consists  of  a  number 
of  unit  stores  operating  under  a  common  management  and 
control,  and  following  common  policies  and  utilizing  common 
methods  of  operation  which  are  determined  by  the  central 
management.  The  chain  store  combines  to  a  large  degree 
the  advantages  of  large  and- small  scale  retailing.  On  the 


LARGE  SCALE  RETAILING  231 

one  hand  it  enjoys  the  economies  of  departmentization,  large 
purchases,  standardization  of  methods,  and  skilled  executives. 
On  the  other  hand,  it  reaches  to  the  very  door  of  the  consumer, 
giving  all  the  conveniences  in  location  of  the  neighborhood 
store. 

Although  the  chain  store  was  in  existence  in  this  country 
before  the  Civil  War  its  most  rapid  growth  has  been  since  that 
time,  particularly  since  the  eighties  and  even  more  especially 
since  about  1910 — a  period  of  rapidly  rising  prices.  The 
volume  of  business  of  some  chains  is  far  greater  than  that 
of  the  greatest  department  stores  and  is  surpassed  by  but 
one  great  mail  order  house.43  The  number  of  stores  in  chains 
ranges  from  two  to  two  thousand  or  more,  and,  if  cooperative 
retail  buying  organizations  are  included,  to  several  thousand.44 

Means  of  Control  and  Ownership. — Chain  store  systems 
are  controlled  in  several  ways.  (1)  Some  are  controlled  by 
firms  formed  for  the  express  purpose  of  carrying  on  a  chain 
of  stores.  (2)  Others  are  controlled  by  retailers  themselves — 
that  is,  by  groups  #f, -retailers  who  form  a  chain  primarily 
as  a  means  of  obtaining  eG0nomiqs*in  buying.45  (3)  Jobbers 
sometimes  own  chains  which  they  have  acquired  through  the 
failure  of  customers,  ^tircrqgh  the  desire  to  keep  eontrol  of  fields 
in  which  retailers  were  buying  dftectly  of  manufacturers,  or 

43  The  following  figures  for  1919  show  the  volufl^  of  business*in  V  few 
of  ftie  .chains :  >^» 

'    .    Great  Atlantic,  and  Pacific  Tea  Co.,  Incv .$194,646,959 

*  Wo'olwDrtfi ,'V. :....* 'A \.w .  .^.  w  .    119,406,107   ra   .• 

AmeriSi/jfltorts •'. . . .'.'.': «.:. .."... . \.f. . .  7     76,401,889 

United  -Cigar  Stores 61,874,053         •+ 

Kresge    42,668,060 

McCrory 11,487,045 

44  There  are  more  than  8,000  stores  in  the  United  Drug  Company — the 
"Rexall"  stores.  * 

45  These,  however,  are  not  always  considered  chain  stores.    The  term 
is  more  usually  applied  to  stores  controlled  by  a  single  owner,  whereas 
retailer  controlled  chains  are  more  in  the  nature  of  cooperative  jobbing 
organizations,  each  retail  unit  controlling  its  own  activities  as  does  any 
independent  store. 


232  PRINCIPLES  OF  MARKETING 

through  the  desire  to  enter  new  fields  or  new  territories.  (4) 
Manufacturers'  chains  are  usually  formed  because  of  the  in- 
ability of  the  producer  to  find  satisfactory  means  of  market- 
ing through  ordinary  retail  channels  or  because  it  is  antici- 
pated that  larger  profits  will  accrue.  Because  jobbers  or  re- 
tailers will  not  handle  or  push  the  manufacturers'  products, 
or  because  of  the  failure  of  retailers  to  maintain  prices,  substi- 
tution, and  other  difficulties,  many  manufacturers  have  been 
forced  into  the  retail  field.46  Finally,  (5)  there  are  chain 
systems  composed  of  consumer  cooperative  stores.  These 
stores,  which  are  widespread  in  Europe,  come  into  direct  com- 
petition with  the  privately  owned  "multiple"  or  chain  stores. 

Chain  store  systems  are  found  in  almost  all  retail  lines. 
More  familiar  are  the  great  chains  found  in  the  grocery  and 
restaurant  business,  the  variety  ("five  and  ten  cent  stores"), 
tobacco,  and  shoe  business.  But  they  are  found  in  many  other 
lines,  such  as  drugs,  hats,  meats,  dry  goods,  hardware,  cloth- 
ing, automobile  accessories,  confectionery,  coal,  and  flowers. 

Chain  Store  vs.  Specialty  Store. — The  chain  store,  as  in  the 
case  of  the  department  store,  finds  its  strongest  competitor 
in  the  unit  store.  But  with  the  recent  rapid  growth  of  chains 
in  smaller  towns  and  cities  they  have  now  come  into  direct 
competition  with  country  general  stores.  Instead  of  com- 
peting with  specialty  stores  of  many  kinds,  however,  as  does 
the  department  store  or  mail  order  house,  a  chain  system  is 
usually  confined  in  its  activities  to  a  single  line;  competing 
only  with  stores  handling  that  line  of  goods,  including  of 
course,  department  stores.  The  competition  with  department 
stores  is  not  important,  however,  because  \department  stores 
specialize  in  the  sale  of  shopping  lines  ana  most  chain  store 
Systems  sell  convenience  goods.  This  line  of  demarkation  is 
not  distinct,  but  the  characterization  is  typical. 

48  It  is  generally  claimed  that  the  profits  are  less  in  the  retail  field  than 
in  the  manufacturing  end  of  the  business ;  and  so  manufacturers  are 
not  particularly  inclined  toward  this  method  of  disposing  of  their 
product. 


LARGE  SCALE  RETAILING  233 

Peculiar  Advantages. — Aside  from  the  advantages  which 
it  possesses  in  common  with  other  large  scale  organizations, 
such  as  large  buying  power,  economies  in  accounting,  adver- 
tising, delivery,  and  departmentization,  the  chain  store  has 
other  advantages  over  competing  specialty  stores.  (1)  Goods 
which  move  slowly  in  one  store  or  section  of  the  territory 
may  be  found  more  readily  salable  in  other  territories  and 
in  other  stores,  and  slow  moving  goods  are  quickly  discov- 
ered. (2)  In  local  competition  the  chain  can  lower  prices 
to  meet  prices  at  one  point  without  lowering  them  in  other 
markets.  (3)  The  expense  of  chain  store  operation  is  un- 
doubtedly less  than  is  that  of  the  average  unit  store,  although 
there  is  reason  to  believe  that  the  most  efficiently  managed 
unit  stores  do  business  at  as  low  a  cost  as  the  chain  stores 
or  even  at  a  lower  cost/  A  few  new  stores,  poorly  located 
stores,  or  a  few  ineffectively  managed  stores  can  greatly  in- 
crease the  average  expense  in  a  chain.  Their  lower  operating 
expense  is  due  to  such  things  as  the  determination  and  use  of 
superior  methods,  the  use  of  low  priced  help  closely  super- 
vised, and,  often,  the  reduction  of  services.  The  cash-and- 
carry  system,  although  not  confined  in  its  use  to  the  chain 
store,  is  a  common  aeeompaniment  thereof.47  A  few  chains 
in  the  grocery  field  4iave  introduced  the  self-serve  store.  This 
applies  the  cafeteria  idea  to  retailing.  It  is  assumed  that 
a  more  economical  service  results,  for  clerks  do  not  have  t4 
wait  upon  customers  so  extensively  as  they  do  in  other  stores. 
A  chief  advantage  is  that  customers  can  pass  near  all  the 
goods,  and  contemplate  their  purchases  at  leisure,  without 
taking  the  time  of  the  clerks  or  of  waiting  customers. 

(4)  A  minimum  of  stock  can  be  carried  in  a  central  ware- 
47  Apparently  the  savings  in  operating  expense  are  not  entirely  respon- 
sible for  the  success  of  chain  stores,  for  unit  stores  of  the  cash-and- 
carry  type  have  not  been  conspicuously  successful.  Only  when  the  ad- 
vantages of  superior  buying  are  present  do  cash-and-carry  stores  seem 
tq  reach  their  maximum  of  success.  The  savings  from  the  reduction  of 
service  alone  ace  not  always  enough  to  offset  the  decreased  service  in 
the  eyes  of  consumers.  % 


234  PRINCIPLES  OF  MARKETING 

house  where  storage  expenses  are  far  less  per  unit  than  on  the 
shelves  of  the  store  in  the  retail  district.  Goods  thus  stored 
can  be  parceled  out  as  the  demands  of  the  units  require  and 
the  stock  carried  can  be  held  at  a  minimum  because  of  the 
better  facilities  for  knowing  the  demand  of  the  large  number 
of  stores,  and  the  superior  facilities  for  getting  orders  filled 
promptly  in  case  of  need. 

(5)  Standardized  methods  make  it  possible  to  utilize  the 
one  best  way  for  doing  each  thing.    The  services  of  a  few 
experts  can  be  felt  throughout  the  organization  as  a  result 
of  this  specialization  and  standardization  in  the  system — for 
example,  uniformity  in  window  displays  and  store  arrange- 
ments, in  hiring  and  training  employees,  in  store  service  and 
selling  policies.     High   administrative  expense   and  the  high 
salaries  that  must  be  paid  to  these  experts  tend  to  offset  some 
of  the  advantages  but  when  spread  over  a  large  enough  num- 
ber of  units  these  expenses  become  less  important. 

(6)  Price  Appeal:   Turnover. — With  lower  unit  expenses 
than  their  competitors  and  lower  costs  of  merchandise  it  is 
evident  that  the  chain  stores,  if  they  desire,  can  make  an  ef- 
fective price  appeal.    And  they  do  so  to  a  very  great  degree.48 
The  policy  of  low  prices  and  rapid  sales  is  nowhere  carried 
on  so  successfully  as  in  the  better  chain  store  systems.49 .  Un- 
fortunately, turnover  figures  of  chain  stores  cannot  be  closely 
compared  with  those  of  unit  stores.    The  exceptional  store  of 
a  chain  should  not  be  taken  as  a  sample,  for  its  record  will 
be  offset  by  the  showing  of  the  poorer  stores.    Furthermore 
neither  a  single  store's  stock-turn  nor  the  average  of  all  the 

48  C.  W.  Hurd  and  M.  Zimmerman,  "How  Big  Retailers'  Chains  Out- 
sell Independent  Competitors,"  Printers'  Ink,  Dec.  3,  1914,  pp.  69-70. 

49  Whereas  the  turnover  of  city  grocery  stores  is  around  ten  or  twelve 
times  per  annum,  chain  grocers  have  been  reported  as  doing  as  well  as 
forite  times;  cigar  and  tobacco  stores  average  around  four  to  six,  one 
grdit  chain  is  credited  with  as  high  as  fifty,  for  some  of  its  stores;  pri- 
va^e  variety  stores  have  a  turnover  of  about  eight  to  ten,  five-and-ten- 
/tfent  chains  of  from  ten  to  twelve.    Idem,  Printers'  Ink,  Dec.  3,  1914, 
p.  66  ff. 


LARGE  SCALE  RETAILING  235 

stores  is  a  proper  unit  to  compare  with  the  competing  unit 
store.  For  the  stores  of  the  chain  might  have  a  very  high 
turnover  but  there  might  be  a  very  slow  turn  of  the  reserve 
stock,  although  this  is  not  likely  when  the  chain  is  well  or- 
ganized. The  only  true  comparison  would  be  between  the 
turnover  of  the  whole  chain  organization,  retail  and  wholesale, 
and  that  of  the  jobber  and  his  retailer.  This  it  is  impossible 
to  make  in  any  satisfactory  way.50  In  so  far  as  a  rapid  turn- 
over can  be  accepted  as  a  criterion  of  success  in  retailing,  it 
is  evident  that  the  chain  stores  are  on  the  right  track.  Their 
rapid  turns  show  they  are  utilizing  their  superior  merchandis- 
ing efficiency  to  strengthen  their  organization  at  the  point 
where  the  average  store  is  weak. 

(7)  Superior  Buying. — Not  only  do  chain  stores  have  a  lower 
expense  of  doing  business  and  a  more  rapid  turnover  than 
competing  small  stores,  but  they  also  have  the  superior  buying 
ability  of  large  establishments.51  In  the  chain  store  at  its 
best,  this  means  lower  costs,52  better  goods,  a  greater  variety, 
and  more  consideration  from  those  whose  goods  they  purchase. 

60  Converse  makes  an  interesting  comparison,  however,  which  supports 
the  assumption  of  the  rapid  turnover  of  chain  stores.  He  cites  data  to 
show  that  the  average  turnover  period  of  wholesale  grocers  is  70  days 
and  of  retail  grocers  is  46  days,  a  total  of  116  days,  and  that  "A  chain 
store  operating  its  own  wholesale  warehouse  and  turning  its  stock  7 
times  a  year  requires  only  52  days  to  effect  a  complete  turnover." — 
Paul  D.  Converse,  Marketing  Methods  and  Policies  (1921),  pp.  319-320. 

""The  success  of  our  organization  may  be  attributed  to  great  buying 
power  and  ability  to  take  advantage  of  all  cash  discounts,  combined  with 
economy  in  distribution." — This  is  a  statement  by  F.  W.  Woolworth  in 
a  letter  of  Feb.  14,  1912,  in  connection  with  the  reincorporation  of  the 
Woolworth  Company,  as  quoted  in  A.  S.  Dewing,  The  Financial  Policy 
of  Corporations  (1920),  Vol.  IV,  p.  57. 

"Manufacturers  sometimes  agree  to  extend  the  time  for  cash  dis- 
counts by  two  or  three  weeks.  In  this  way  large  buyers  can  finance 
many  of  their  purchases  out  of  the  sale  of  the  actual  goods.  This  is 
particularly  true  of  the  chains  with  rapid  stock-turns.  This  scheme  is 
in  the  nature  of  an  inside  price  and  is  not  looked  upon  with  favor  by 
small  stores,  or  by  the  manufacturers  themselves. 


236  PRINCIPLES  OF  MARKETING 

(8)  The  larger  chain  stores  have  gone  as  far  as  the  mail 
order  house  and  the  department  store  in  departmentization  and 
specialization  of  administrative  departments.  Separate  ac- 
counting departments,  buying  departments,  store  fixtures,  real 
estate  departments,  or  even  subsidiary  companies  for  purchas- 
ing the  real  estate  utilized,  are  important  parts  of  the  business 
of  larger  systems;  and  the  standardization  of  methods  assures 
that  the  one  best  way  will  be  used  in  each  store. 

Personnel  Problem. — As  with  other  large  scale  organiza- 
tions the  chief  disadvantage  of  the  chain  store  is  the  personnel 
problem.  In  the  case  of  chain  stores  operating  throughout 
large  sections  of  the  country  it  is  evident  that  this  problem 
is  even  more  important  than  it  is  to  the  department  store,  or 
mail  order  house,  in  which  the  owners  can  be  in  close  proxim- 
ity to  their  business  all  the  time.  How  to  get  hired  managers 
to  run  stores  effectively  is  as  yet  an  unsolved  problem.  Much 
is  being  done  through  partnership  plans,  careful  training,  im- 
proved wage  systems,  contests,  inspection,  and  other  methods. 
But  the  fact  remains  that  the  hired  manager  is  not  likely 
to  be  so  efficient  as  the  same  man  would  be  in  his  own  store, 
either  in  watching  the  little  things  that  make  for  success  or 
in  gaining  the  good  will  of  customers.  Furthermore,  when 
a  good  manager  develops  he  is  likely  to  go  into  business  for 
himself.  In  the  case  of  those  chains  which  are  made  up  of  re- 
tailers who  cooperate  in  owning  a  central  buying  organiza- 
tion this  particular  problem,  however,  is  not  found.53 

Consolidation. — A  tendency  toward  consolidation  is  evident 
among  chain  store  systems  and  the  last  few  years  have  brought 
many  combinations  of  competing  systems.  As  the  advantages 
which  such  stores  have  over  ordinary  stores  are  offset  to 
some  extent  by  the  growth  of  competing  chains,  it  appears 
that  new  advantages  are  sought  through  greater  size;  and 
undoubtedly  the  mere  accumulation  of  profits  or  financial 

68  A  good  illustration  is  the  United  Drug  Company,  the  "Rexall" 
stores.  See  Paul  T.  Cherington,  Elements  of  Marketing,  pp.  173-186, 
for  a  discussion  of  this  point. 


LARGE  SCALE  RETAILING  237 

power  leads  to  the  same  end  when  the  more  direct  method  of 
establishing  new  stores  does  not  seem  so  feasible. 

Other  important  tendencies  involve  the  control  of  factories 
and  the  expansion  of  the  business  into  smaller  towns  and 
cities.  Many  small  towns  now  have  units  of  large  chain  store 
systems.  In  the  West  the  "Penny"  system  of  dry  goods  stores 
limits  its  activities  entirely  to  smaller  towns  and  cities.  Where 
towns  are  too  small  to  warrant  the  establishment  of  stores 
some  manufacturers'  chains  have  resorted  to  the  establishment 
of  exclusive  agencies,54  which,  although  not  direct  parts  of 
the  chain,  share  in  niany  of  its  advantages. 

Future  of  the  Chain  Store. — So  long  as  jobbers  and  manu- 
facturers continue  to  desire  new  and  wider  markets  for  their 
products  than  existing  retail  methods  provide,  so  long  as  large 
purchases  and  purchases  for  cash  can  be  made  at  lower  prices, 
and  so  long  as  inside  prices  are  given  to  powerful  buyers,  we 
can  expect  to  see  chain  stores  increase  in  number  and  im- 
portance. Consolidation  will  also  continue,  for  as  the  special 
advantages  which  chain  stores  now  exert  over  their  small  com- 
petitors are  minimized  through  the  establishment  of  com- 
peting chain  stores,  competition  will  lead  to  consolidation  to 
gain  the  possibilities  of  increased  power  through  the  use  of 
larger  and  larger  units.  With  the  further  advantages  of  low 
costs,  rapidturnover,  and  convenience  injocation  near  the  con- 
sumer it  seems  that  the  chain  store  is  likely  to  find  for  itself 
an  increasing  field  of  usefulness. 

64  An  exclusive  agent  is  a  retailer  to  whom  has  been  given  the  exclu- 
sive right  to  handle  a  certain  product  or  certain  products  in  a  particular 
territory. 


CHAPTER  XIII 

DISTRIBUTIVE  COOPERATION 

Distributive  cooperation  is  the  control  of  marketing  agencies 
by  associations  of  producers,  consumers,  or  middlemen.  It 
involves  the  substitution  of  an  associated  control  of  steps  in 
distribution  for  that  which  is  normally  exercised  by  inde- 
pendent agencies.  This  control  is  exercised  by  the  parties  who 
formerly  sold  to  or  bought  from  these  independent  agencies. 
Thus,  it  means  for  producers  the  associated  control  of  the 
channels  through  which  their  products  reach  the  market.  It 
brings  about  for  consumers  associated  control  over  the  chan- 
nels through  which  they  are  supplied  with  the  commodities 
they  buy.  It  involves  for  merchants  associated  control  over 
the  channels  through  which  they  purchase  merchandise  for  re- 
sale.1 

1  A.  mass  of  literature  has  appeared  upon  the  subject  of  cooperation. 
But  unfortunately  there  has  been  little  unprejudiced  investigation  of 
the  results  of  cooperation.  Of  the  more  accessible  sources  of  informa- 
tion the  following  incomplete  list  will  be  of  value. 

The  books  which  are  mentioned  are  useful  both  in  themselves  and  for 
the  bibliographies  and  footnote  references  which  they  contain:  J.  L. 
Coulter,  Cooperation  among  Farmers  (1918) ;  W.  W.  Cumberland,  Co- 
operative Marketing  (1917) ;  E.  P.  Harris,  Cooperation:  the  Hope  of  the 
Consumer  (1918);  B.  H.  Hibbard,  Marketing  Agricultural  Products 
(1921),  Part  III;  G.  H.  Powell,  Cooperation  in  Agriculture  (1913); 
'Albert  Sonnichsen,  Consumer's  Cooperation  (1919).  The  U.  S.  Dept. 
of  Agriculture,  Bui.  No.  547  and  the  U.  S.  Supt.  of  Documents, 
Price  List  68  (5th  ed.),  also  contain  bibliographies. 

The  U.  S.  Department  of  Agriculture  and  several  of  the  State  Agri- 
cultural Experiment  Stations  have  published  many  documents  relating 
to  cooperation.  Among  the  more  important  of  these  are:  The  U.  S. 
Department  of  Agriculture,  Bulletins  394,  541,  547,  860,  937;  Farmers' 
Bulletins  718,  1144;  Yearbook  of  Department  of  Agriculture,  1919, 

238 


DISTRIBUTIVE  COOPERATION  239 

In  a  more  restricted  sense  cooperation  is  confined  in  mean- 
ing to  the  association  of  agricultural  producers  for  the  sale  of 
their  products  and  the  cooperation  of  final  consumers  in  pur- 
chasing the  goods  which  they  use.  As  these  are  now  the 
more  important  aspects  of  cooperation  the  present  discussion 
is  confined  to  them.2 

Cooperative  Organization  vs.  Independent  Organization. 
— Important  differences  exist  between  cooperative  distribution 
and  the  ordinary  methods  of  marketing.  These  differences, 
however,  are  more  a  matter  of  control  than  a  difference  in  the 
actual  methods  used.  The  ultimate  purpose  is  to  gain 
some  advantage  for  the  persons  associated.  This  is  usually 
found  to  relate,  directly  or  indirectly,  to  some  price  advan- 
tage. It  may  be  lower  prices  to  the  consumer,  higher  prices 
to  the  producer,  or  lower  prices  for  goods  purchased  for  resale 
by  the  merchant.  These  price  advantages  the  cooperators 
hope  to  obtain  through  their  control  of  marketing;  and  they 
may  result  either  from  higher  or  lower  prices,  from  the  absorp- 
tion of  profits  commonly  going  to  middlemen,  from  the  im- 
provement of  merchandising  methods,  or  from  the  lowering  of 
expenses. 

Features  of  Cooperation. — Since  the  aim  of  cooperation  is 
to  control  marketing  in  the  interests  of  the  producers  or  con- 
sumers who  are  associated,  a  type  of  organization  has  been 
developed  to  assure  such  control.  The  chief  features  of  or- 

Separate  No.  819;  Cornell  University  Agricultural  Experiment  Station, 
Memoir  28;  The  University  of  Minnesota,  Agricultural  Experiment  Sta- 
tion, Bulletins  146,  152,  156,  164,  166,  167,  171,  184;  The  University  of 
Wisconsin,  Agricultural  Experiment  Station,  Bulletins  238,  282,  314,  322; 
University  of  Kansas,  Agricultural  Experiment  Station,  Bui.  224;  Uni- 
versity of  Iowa,  Agricultural  Experiment  Station,  Bui.  200. 

Publications  of  the  U.  S.  Grain  Growers,  Inc.  (58  East  Madison  Street, 
Chicago),  are  descriptive  of  an  interesting  experiment  in  cooperation. 

2  There  are  a  number  of  examples  of  central  purchasing  agencies 
owned  and  controlled  by  retailers.  See  a  list  in  the  Mercantile  Coop- 
erator,  March  6,  1920.  Their  activities  are  discussed  briefly  in  P.  T. 
Cherington,  Elements  oj  Marketing,  pp.  173-179. 


240  PRINCIPLES  OF  MARKETING 

ganization  which  differentiate  the  typical  cooperative  associa- 
tion from  the  usual  business  organization  are  these: 

1.  One  vote  is  usually  allowed  per  member,  regardless  of  the 
amount  of  his  investment. 

2.  No  profits  above  interest  at  about  the  market  rate  are 
paid  to  shareholders  on  the  money  they  invest.3 

3.  The  division  of  dividends  is  based  upon  the  patronage  of 
the  members  and  frequently  %of  non-members  —  the  "patron- 
age dividend." 

4.  The  "cooperative  spirit"  of  loyalty  to  the  organization  is 

fostered. 

The  first  three  of  these  features  clearly  differentiate  the 
cooperative  enterprise  from  the  ordinary  form  of  business 
organization.  Whereas  the  business  enterprise  which  is  en- 
gaged in  marketing  buys  and  sells  goods  or  services  for  the 
purpose  of  making  profits  for  those  who  own  it,  the  cooperative 
primarily  in  the  interest  of  producers  or 


^ 

consumers  —  the  patrons,  it  is^ontrolled  by  them  and  is  run 
for  their  benefit.  The  chief  benefits  to  farmers  arise  from 
higher  prices  received  for  the  crops  which  they  sell  through 
their  organizations;  the  chief  benefits  to  consumers  arise  from 
lower  prices  for  the  goods  they  purchase.  In  either  case,  if 
profits  are  made  by  the  organization  they  go  to  the  patrons 
of  the  organization  —  at  least  to  those  who  are  members  of  the 
organization  —  and  not  to  independent  "middlemen." 

One  vote  per  member  and  the  market  rate  of  interest  on  each 
member's  investment  assures  the  members  that  the  organiza- 
tion will  not  be  operated  in  the  interest  of  a  few  large  stock- 
holders, who  may  be  more  interested  in  obtaining  profit  on 
their  investment  in  the  enterprise  than  in  obtaining  the  high- 
est, or  lowest,  prices  for  the  benefit  of  the  remainder  of  the 
producer  or  consumer  membership.  To  make  doubly  sure  that 
this  is  true  most  associations  limit  the  number  of  shares  one 

'Many  associations  are  now  organize^  on  a  non-stock  basis,  as  pro- 
vided for  in  the  cooperative  laws  of  some  of  the  states. 


DISTRIBUTIVE  COOPERATION  241 

person  may  hold,  and  some  producers'  organizations  allow 
only  farmers  to  own  shares. 

The  patronage  dividend  is  a  device  for  tying  the  interest 
of  the  members  to  the  organization.4  Any  surplus  above  ex- 
penses and  reserves,  which  in  a  business  enterprise  would  be 
divided  among  the  shareholders  on  the  basis  of  the  number  of 
shares  each  owns,  is  by  means  of  this  device  divided  among 
the  patrons  of  the  association  on  the  basis  of  their  patronage 
of  the  organization.  In  the  case  of  the  producers'  selling  en- 
terprise these  dividends  are  commonly  divided  among  the 
members  on  the  basis  of  the  volume  of  goods  each  has  sold 
through  the  organization.  In  consumers'  buying  associations 
they  are  divided  on  the  basis  of  purchases  made.5  The 
patronage  dividend  is  particularly  important  only  to  those 
organizations  that  find  it  desirable,  and  possible,  to  make 
profits  above  expenses.  But  such  a  surplus  is  only  incidental. 
The  society  is  operated  not  to  make  profits  from  the  enter- 
prise as  such,  but  to  obtain  higher,  or  lower,  prices  for  the 
members  in  their  sales  or  purchases. 

The  fourth  point  mentioned,  the  "cooperative  spirit,"  is  a 
less  tangible  element.  It  is  neither  economic  nor  legal  in 
its  essence.  It  is  considered  so  important,  nevertheless,  by 
some  of  the  advocates  of  cooperation  that  no  discussion  of  the 
movement  should  fail  to  mention  it.  This  cooperative  spirit 
is  an  intangible  something,  which  when  developed  binds  the 

4  When   cooperative    associations    organize    under    the    ordinary    cor- 
poration laws  it  frequently  develops  that   these   cooperative   features 
cannot   be    legally    enforced.     Consequently,    such    organizations   have 
often  developed  into  purely  "profit-seeking"  private   enterprises.     To 
make  it  possible  to  carry  out  these  features  of  cooperation  many  states 
have  passed  laws  making  provision  for  these  features.    Something  over 
three-quarters  of  our  states  now  have  these  laws. 

5  With  producers'  associations  the  number  of  units  handled  is  likely 
to  be  the  basis  of  division,  since  those  who  sell  when  the  market  is  dull 
are   not   thereby   penalized.    This  is   not  usually   practical   in  buying 
organizations  and  so  the  money  value  of  purchases  is  used.    Sometimes 
non-members   are   encouraged  to   patronize  the   association  by   giving 
them  some  of  the  benefits  of  the  patronage  dividend. 


242  PRINCIPLES  OF  MARKETING 

members  together  in  loyalty  to  their  association.  It  is  prob- 
ably safe  to  say  that  the  fundamental  reason  for  emphasizing 
this  feature  of  cooperation  is  the  tendency  for  the  cooperators 
to  undervalue  the  possible  future  benefits  of  cooperation  once 
the  glamour  of  a  new  enterprise  wears  off.  They  may,  con- 
sequently, sacrifice  those  benefits  in  order  to  realize  imme- 
diate benefit  from  an  act  of  "disloyalty"  to  their  association. 
Competing  business  organizations  commonly  endeavor,  for  ex- 
ample, to  attract  the  members  of  the  association  by  means  of 
some  price  advantage.  If  the  members  take  advantage  of 
this,  their  association  is  thereby  weakened  and  may  even  fail. 
Then,  it  may  be,  the  independent  organization  will  no  longer 
confer  the  benefit  which  drew  the  members  away  from  their 
organization.6 

I.    AGRICULTURAL  COOPERATION 

Cooperative  selling  by  associations  of  farmers  has  been 
more  largely  developed  in  the  United  States  than  has  co- 
operation by  consumers.  During  the  past  fifty  years  the  de- 
velopment of  cooperative  associations  has  progressed  until  to- 
day a  large  part  of  the  production  of  our  important  grain, 
dairy,  and  fruit  growing  sections  is  marketed  through  local 
(Operative  associations  and  an  appreciable  part  of  the 
local  associations  are  members  of  cooperative  enterprises 
engaged  in  wholesaling  the  products  of  their  mem- 
bers. The  chief  of  the  Bureau  of  Markets  of  the  United 
States  Department  of  Agriculture  states  in  his  1920 
report,  "There  are  in  this  country  to-day  approximately 
15,000  farmers'  organizations,  with  a  membership  of  approxi- 
mately 2,000,000  persons."7  At  the  present  time  over  half 

8  In  agricultural  cooperation  this  difficulty  is  now  being  attacked  by 
means  of  contracts  between  the  grower  and  his  association.  See  O.  B. 
Jesness,  Cooperative  Marketing,  Farmers'  Bulletin  No.  1144  (U.  S.  De- 
partment of  Agriculture,  1920),  pp.  12-14. 

7  Annual  Report  of  the  Chief  of  the  Bureau  of  Markets,  U.  S.  Depart- 
ment of  Agriculture,  Oct.  9,  1920,  p.  6. 


DISTRIBUTIVE  COOPERATION  243 

the  grain  arriving  in  Chicago  comes  from  farmers'  elevators,8 
and  over  three-fourths  of  the  live  stock  going  into  the  South 
St.  Paul  market  is  shipped  by  cooperative  associations.9 

Organization  Features. — A  large  number  of  associations  in 
this  country  do  not  strictly  adhere  to  the  features  of  coopera- 
tive organization  just  described.  This  is  due  in  some  instances 
to  a  failure  to  know  or  recognize  their  importance.  In  other 
instances  the  cooperatives  have  been  organized,  in  the  absence 
of  cooperative  laws,  under  the  ordinary  corporation  laws.10 
Under  such  conditions  the  features  of  a  cooperative  business 
organization  can  be  enforced  only  by  mutual  agreement,  and 
this  is  often  lacking  after  the  first  enthusiasm  wears  off.  With 
the  passage  of  cooperative  laws  in  over  three-quarters  of  our 
states  this  difficulty,  however,  is  being  overcome.  Under  such 
laws  the  important  features  of  cooperative  organization  can 
be  enforced. 

The  relations  of  co6perative_asso^.iations  with  the  growers 
vary:  the  cooperative  grain  elevator  usually  buys  for_ca§h,  in 
order  to  compete  successfully  with  the  independent  elevators 
which  purchase  in  this  way ;  many  other  associations,  particu- 
larly those  dealing  in  highly  perishable  crops  and  live  stock, 
pool n  their  sales  and  distribute  the  proceeds  only  after  pay- 
ment for  each  shipment  has  been  received  from  the  central 


8  James  E.  Boyle,  Speculation  and  the  Chicago  Board  of  Trade  (1920), 
p.  51. 

•  Letter  from  W.  A.  McKerron,  General  Manager  of  the  Central  Coop- 
erative Commission  Firm,  St.  Paul,  May  21,  1921. 

10  It  is  of  interest  that  Section  6  of  the  Clayton  Anti-Trust  Act 
exempts  certain  types  of  associations  of  farmers  from  the  operation  of 
the  "anti-trust"  features  of  the  act — those  which  are  non-stock,  non- 
profit organizations  organized  for  mutual  benefit. 

"See  p.  255.  "By  pooling  is  meant  averaging  the  returns  received  for 
products  sold  during  a  certain  period,  or  for  certain  shipments,  so  that 
each  grower  having  products  of  the  same  grade  receives  the  same  price. 
This  method  of  operation  protects  the  individual  member  from  loss 
because  of  unfavorable  market  conditions  of  a  temporary  nature." — 
O.  B.  Jesness,  op.  cit.,  p.  14. 


244  PRINCIPLES  OF  MARKETING 

market,  or  they  may  pool  the  proceeds  for  certain  definite 
periods,  as  for  a  month,  or  two  weeks,  or  for  a  whole  season. 
Some  associations  require  their  members  to  sign  contracts 
binding  them  to  give  their  business  to  the  cooperative.12 

Largely  Confined  to  Local  Markets. — The  efforts  of  the 
farmers'  associations  are  frequently  confined  to  the  local 
market.13  The  distributive  functions  they  exercise  and  the 
manner  of  their  performance  are  primarily  the  same  as  those 
of  other  local  agencies  which  ship  the  growers'  product  to  the 
central  market.  The  manner  of  control,  however,  is  differ- 
ent. Whereas  other  local  shipping  agencies  are  independent 
of  the  growers,  controlled  by  local  middlemen  or  by  whole- 
sale dealers  of  the  central  market,  these  are  owned  and  con- 
trolled by  the  growers  themselves.  The  organizations  are 
of  varying  complexity  and  their  permanence  likewise  varies.14 
They  may  be  organized  simply  for  a  season  or  even  for  a 
single  shipment,  or  they  may  be  incorporated,  own  property, 
and  carry  on  extensive  purchasing  activities  in  addition  to 

"This  is  a  part  of  the  plan  of  the  new  U.  S.  Grain  Growers,  Inc. 
See  pp.  254-255. 

13  See,  however,  pp.  248-255. 

"The  most  highly  developed  organizations  are  those  of  the  western 
states,  the  California  Fruit  Growers'  Exchange,  the  California  Associ- 
ated Raisin  Co.,  and  others  handling  prunes,  apricots,  nuts,  etc. 

"No  very  positive  answer  can  be  given  to  the  question  why  this 
marketing  machinery  has  been  developed  in  some  of  the  growing  dis- 
tricts and  not  in  others.  It  is  probable,  however,  that  one  very  impor- 
tant consideration  is  the  need.  The  farmer  who  lives  a  hundred  miles 
or  so  from  a  great  city  can  have  some  knowledge  of  the  conditions 
there  and  of  the  dealers  with  whom  he  will  come  in  contact.  For  the 
small  grower  who  lives  a  thousand  miles  or  more  away  it  is  much  more 
difficult.  Moreover,  where  the  distance  is  great  the  freight  rate  is  of 
more  importance,  and  the  desirability  of  shipping  in  carload  lots  is 
greater.  For  these  and  similar  reasons  the  distant  growers  have  a 
stronger  motive  for  organizing  marketing  associations  of  their  own,  and 
if  an  independent  organization  enters  the  field  it  is  likely  to  find  it 
easier  to  establish  relations  with  the  grower." — Report  of  the  Federal 
Trade  Commission  on  the  Wholesale  Marketing  oj  Food  (1920),  p.  50. 


DISTRIBUTIVE  COOPERATION  245 

their  sales  efforts.15  Local  associations  are  sometimes  asso- 
ciated in  regional  or  state  organizations  and  there  have  been 
some  attempts  at  national  organization.  But  the  regular  cen- 
tral market  agencies  are  usually  utilized  in  their  selling  opera- 
tions, although  some,  as  the  California  Fruit  Growers'  Ex- 
change, have  their  own  bonded  representatives,  or  salaried 
selling  organizations  in  the  larger  markets.  Growers  of  other 
products  have  more  recently  entered  the  field  of  terminal 
market  selling.16  The  Farmers'  Educational  and  Cooperative 
Union  has  developed  cooperative  live  stock  commission  houses 
(The  Central  Live  Stock  Commission  Company)  in  Omaha, 
Kansas  City,  Sioux  City,  St.  Joseph,  and  Denver.  The  most 
recent  attempts  have  been  made  by  the  American  Farm 
Bureau  Federation,  in  cooperation  with  other  large  agricultural 
organizations,  to  control  the  marketing  of  the  country's  grain 
crop  through  the  newly  organized  Grain  Growers  Incor- 
porated,17 and  to  market  live  stock  through  the  National  Live 
Stock  Producers'  Association.  Even  in  these  instances  the 
existing  machinery  of  the  central  market  is  largely  utilized. 
Purpose  of  Local  Associations. — These  organizations  per- 
form the  same  functions  in  the  growers'  market  as  do  in- 
dependent dealers  handling  the  same  products.  There  is  no 
reason  to  believe  that  they  are  on  the  whole  any  more  ef- 
ficient in  operation  than  are  the  local  dealers,  except  that  a 
single  farmers'  association,  when  operating  on  a  larger  scale 
than  do  the  independents,  may  achieve  substantial  economies.18 

15  Sometimes  such  associations  buy   many   things  for  their  patrons, 
particularly  such  bulky  products  as  coal,  flour,  and  machinery.    From 
this  to  the  actual  formation  of  a  cooperative  store  has  sometimes  been 
a  natural  step. 

16  See  pp.  250-255. 
"See  pp.  254-255. 

u  Cooperatives  do  operate  on  a  larger  scale  in  the  grain  trade  at  least. 
In  1916-17  the  average  commercial  line  elevator  purchased  77,250 
bushels  of  grain,  the  average  cooperative  line  136,825  bushels;  of  indi- 
vidual elevators  the  cooperatives  averaged  152,792  bushels  and  the 
independents  102,934  bushels.  Report  of  the  Federal  Trade  Commission 
on  the  Marketing  of  Grain,  Vol.  I.,  p.  117. 


246  PRINCIPLES  OF  MARKETING 

But  these  associations  are  frequently  organized  to  meet  real 
evils,  such  as  the  failure  of  the  local  shipper  to  pay  enough 
for  better  grades,  his  retention  of  too  large  a  margin,  monopoly 
or  combination  among  shippers;  and  at  some  points  they  have 
been  organized  because  no  specialized  local  dealer  existed. 
Even  the  threat  of  association,  or  the  presence  of  growers' 
organizations  in  another  field  whose  members  contemplate 
associative  marketing,  has  sometimes  brought  better  service 
from  local  middlemen  who  had  not  been  giving  the  growers 
all  the  market  warranted. 

The  chief  object  of  these  organizations  is  not  to  gain  profit 
on  the  selling  operation,  but  to  get  a  higher  price  for  the 
farmer's  crop.  The  patronage  dividend,  consequently,  some- 
times plays  a  large  part.  In  the  selling  of  grain,  for  example, 
the  practice  of  the  trade  often  necessitates  the  outright  pur- 
chase of  the  farmers'  grain  by  the  cooperative  elevator.19  In 
such  cases,  sound  business  practice  requires  that  the  goods 
be  handled  on  a  sufficient  margin  to  cover  the  risks  of 
the  business.  But  outright  purchase  at  the  local  shipping 
point  is  not  generally  prevalent  in  the  sale  of  fruits  and  vege- 
tables, and  of  live  stock  consigned  to  central  market  dealers. 
In  the  sale  of  these,  and  of  most  farm  products,  the  growers 
must  wait  for  the  proceeds  of  the  transaction.20  Under  these 
conditions  the  association  may  act  as  a  sales  agent  for  the 
growers;  the  risk  is  less,21  and  the  costs  are  divided  according 

19  Op.  tit.,  pp.  94-95. 

20  Grain  elevators  may  obtain  some  protection  against  loss  by  "hedg- 
ing," pp.  362-368,  but  this  is  not  available  to  fruit  and  live  stock  asso- 
ciations. 

21 A  considerable  saving  over  the  usual  costs  of  shipment  through 
independent  buyers  has  been  made  in  shipping  live  stock  under  these 
conditions.  See  E.  Dana  Durand,  Cooperative  Livestock  Shipping  Asso- 
ciations in  Minnesota,  The  University  of  Minnesota',  Agricultural  Ex- 
periment Station,  Bui.  156  (1916),  p.  7;  and  B.  H.  Hibbard,  L.  G. 
Foster,  and  D.  G.  Davis,  Wisconsin  Livestock  Shipping  Associations, 
University  of  Wisconsin,  Agricultural  Experiment  Station,  Bui.  314 
(Aug.,  1920),  p.  6. 


DISTRIBUTIVE  COOPERATION  247 

to  the  amount  of  business  done.  The  proceeds  above  costs 
may  be  paid  to  each  patron  for  his  own  product,  which  is 
separately  sold  at  the  central  market;  but  in  some  cases  it 
has  been  found  more  satisfactory  to  pool  both  profits  and  costs 
on  the  basis  of  the  units  handled  during  a  given  period.  In 
this  way  all  members  bear  equally  any  fall  in  price  and  gain 
equally  in  case  of  a  rise.22 

Improved  Grading  and  Improved  Products. — It  is  particu- 
larly true  of  the  more  perishable  commodities  that  there  are 
wide  variations  in  prices  for  graded  as  against  ungraded 
products.  And  one  great  gain  from  the  cooperative  move- 
ment has  been  the  improvement  and  standardization  of  prod- 
ucts to  conform  more  nearly  to  the  demands  of  the  market. 
This  results  in  higher  prices  for  the  farmer's  crops,  and  in 
turn  has  led  to  better  farming,  for  it  has  made  the  farmer 
appreciate  the  need  for  better  products.23  This  is  very  im- 
portant. For  the  local  buyer  often  pays  a  flat  price,  or  grades 
products  roughly,  thereby  overpaying  producers  of  low  qual- 
ity goods  and  underpaying  the  producers  of  superior  crops. 
Paying  a  uniform  price  penalizes  the  best  producers,  and 
grading  too  low  penalizes  all  producers.  The  formation  of 
farmers'  associations  has  had  an  important  effect  on  such 
practices,  since  they  secure  for  the  individual  farmer  the 
market  price  for  the  particular  grades  he  has  produced.24 

23  To  do  this  successfully  necessitates  a  system   of   careful   grading 
that  will  make  it  possible  for  each  grower  to  be  paid  according  to  the 
market  value  of  his  goods. 

33  "The  farmer  is  frequently  criticized  for  lack  of  attention  to  the 
uniformity  and  quality  of  his  products.  As  an  individual  he  is  power- 
less to  remedy  this  weakness.  A  multitude  of  other  duties  requires  his 
attention;  he  does  not  have  an  opportunity  to  become  intimately 
acquainted  with  the  demands  of  the  trade;  and  his  production  is  too 
limited  to  attract  much  attention,  even  .though  he  uses  a  great  deal  of 
care  in  the  handling  and  preparation  for  market  of  his  products." — 
O.  B.  Jesness,  Cooperative  Marketing,  U.  S.  Department  of  Agriculture, 
Farmer's  Bulletin  No.  1144  (1920),  p.  4. 

24  Managers  of  farmer  associations  make  the  assertion  at  least  that 
this  is  true  and  some  investigations  made  by  the  writer  in  1913  lead 


248  PRINCIPLES  OF  MARKETING 

Furthermore,  these  associations  make  it  more  likely  that 
growers  will  get  the  top  price  for  their  products.  It  is  said, 
apparently  with  justice,  that  the  privately  owned  shipping 
agencies,  in  business  to  profit  for  themselves  from  the  ser- 
vices they  render,  sometimes  pay  a  lower  price  than  the  market 
warrants.  In  this  way  the  margin  from  which  they  must  ob- 
tain their  profit  is  increased.  It  has  been  asserted  that  as 
cooperation  has  grown  and  shown  its  strength,  the  ends  which 
are  desired  can  often  be  gained  merely  from  the  knowledge 
of  the  independent  shipper  that  he  is  constantly  competing 
with  a  potential  competitor  in  the  association  which  the  farm- 
ers may  organize.  Again,  the  size  of  an  association's  ship- 
ments commands  respect  at  the  central  market  and  their  com- 
petition at  the  local  market  has  forced  many  independent 
dealers  to  mend  their  ways.  In  the  case  of  such  products  as 
fruits  and  vegetables,  for  which  there  are  no  generally  ac- 
cepted grades,  these  associations  have  promoted  better  agri- 
culture, established  brands  of  their  own,  and  through  making 
them  known  to  their  customers  have  secured  the  full  benefit 
of  their  superior  production. 

Federation  of  Growers'  Associations. — There  has  been  an 
important  growth  in  recent  years  of  cooperative  wholesale  or- 
ganizations. It  is  said  that  the  farmer  does  not  receive  the 
full  benefit  of  his  organization  unless  local  associations  fed- 
erate in  order  to  exercise  more  influence  in  the  central  market. 
Among  the  benefits  to  be  derived  from  marketing  federations 
the  following  are  commonly  stressed: 

1.  Products  can  be  stored  from  the  season  of  abundance  and 
sold  when  the  market  conditions  prove  to  be  satisfactory, 

him  to  believe  that  much  has  been  accomplished.  There  is  much  pres- 
sure brought  to  bear,  nevertheless,  which  keeps  the  best  results  from 
being  achieved.  If  farmer  A's  corn  is  grade  No.  1  and  the  corn  of 
farmer  B  whose  farm  lies  next  to  farmer  A  is  graded  2  or  3  a  dispute 
is  very  likely  to  result  which  may  in  the  end  lead  the  manager  to  meet 
the  situation  as  the  independents  sometimes  say  they  have  been  forced 
to  do,  namely,  to  grade  it  all  alike. 


DISTRIBUTIVE  COOPERATION  249 

and  in  the  most  satisfactory  market.  This  is  particularly 
important  with  those  commodities  whose  markets  tend  to 
be  glutted  in  the  harvest  season.  By  helping  the  farmer 
to  hold  his  products,  through  the  provision  of  storage 
facilities  and  assistance  in  financing,  by  studying  the 
market  to  determine  the  best  time  to  sell,  and  by  con- 
trolling an  appreciable  part  of  the  supply,  such  federa- 
tions, it  is  urged,  can  steady  the  market  and  procure 
more  satisfactory  prices  for  the  grower.25 

2.  A  federation,  because  of  the  volume  of  its  business,  can 

afford  to  keep  in  close  touch  with  the  market.  Some 
associations,  for  example,  go  so  far  as  to  have  private 
wires  to  their  principal  markets.  Few  local  associations 
can  afford  any  telegraphic  expenses,  but  when  a  number 
cooperate  the  expense  to  each  is  small. 

3.  The  association  can  bring  pressure  to  bear  in  educating 

growers  in  the  production  of  the  best  market  types  and 
in  the  proper  preparation  of  the  product  for  market. 

4.  Products  can  be  graded  and  similar   commodities   from 
various  points  packed  and  sold  together  in  large  quan- 
tities. 

5.  The    federation    may    advertise    its    products,    establish 
brands   and   trade-marks,    and   otherwise   assist   in   the 
creation  of  demand. 

6.  Many  miscellaneous  services  can  be  performed:    freight 

claims  can  be  adjusted;  pressure  can  be  brought  to  bear 
to  correct  abuses  in  central  markets;  legislation  can  be 
influenced. 

Extent  of  Wholesale  Activities. — But  by  no  means  the 
whole  field  of  wholesaling  is  taken  over  by  these  central  as- 
sociations. The  actual  sale  of  the  goods  is  generally  made 
through  independent  middlemen  of  the  central  markets.  In- 
deed, until  recently  little  central  market  work  has  been  carried 
on  by  the  cooperative  organizations  engaged  in  the  sale  of  the 

25  See  Theodore  Macklin,  Marketing  by  Federations,  University  of 
Wisconsin,  Agricultural  Experiment  Station,  Bui.  322  (Dec.,  1920). 


250  PRINCIPLES  OF  MARKETING 

staple  products.  This  is  probably  due  to  the  fact  that  such 
products  are  already  merchandised  efficiently  and  cheaply  in 
the  central  markets  so  that  a  wholesale  cooperative  organiza- 
tion could  help  little  if  any.  It  may  also  be  possible  that 
the  opposition  of  the  organized  interests  26  at  the  central  mar- 
kets has  militated  against  such  organizations  as  have  been  at- 
tempted. There  has  been,  however,  a  growing  demand  for 
central  market  wholesaling  by  cooperatives.  In  almost  every 
fruit  and  vegetable  growing  region  in  the  country  such  asso- 
ciations have  been  attempted,  some  of  which  do  several 
millions  of  dollars  of  business  a  year.  In  the  creamery  busi- 
ness some  centralizing  of  market  information  and  control 
has  been  attempted  in  a  few  instances,  but  it  has  not  devel- 
oped far,  although  Minnesota  creameries  are  now  federating 
and  the  Wisconsin  cheese  producers  have  a  large  central  or- 
ganization.27 Potato  shippers  in  Michigan,  Minnesota,  Vir- 
ginia, and  other  states  now  have  central  federations  of  potato 
shippers.  There  are  also  federations  of  cotton  growers,  and 
the  burley  tobacco  growers  have  recently  organized  an  asso- 
ciation with  about  50,000  members.  In  Canada,  a  central 
warehouse  and  selling  organization  for  wheat  has  been  estab- 
lished at  Winnipeg,  and  farmers'  terminal  commission  com- 
panies handle  live  stock  in  several  markets.  In  addition  to 
these  the  United  States  Grain  Growers  Incorporated  and  the 
National  Live  Stock  Producers'  Association  have  recently  been 
organized.28 

28  "One  of  the  most  important  and  difficult  problems  which  we  have 
to  solve  is  how  to  assist  cooperative  agencies  to  educate  the  business 
men  of  the  country  so  that  they  will  concede  the  right  of  the  farmer  to 
enter  the  marketing  field.  Many  successful  business  men  are  engaged 
in  a  number  of  enterprises,  few  confining  themselves  to  one  field  of 
endeavor,  and  there  appears  to  be  no  valid  reason  why  the  farmer 
should  be  denied  the  same  privilege  which  they  enjoy." — U.  S.  Depart- 
ment of  Agriculture,  Report  oj  the  Chief  of  the  Bureau  of  Markets 
(1920),  p.  6. 

27  See  Theodore  Macklin,  op.  cit. 

28  See  pp.  254-255. 


DISTRIBUTIVE  COOPERATION  251 

Most  of  these  associations  are  confined  in  their  sales  activi- 
ties to  single  products  or  closely  related  goods.  A  number 
are  found  in  the  fruit,  grain,  dairy,  and  live  stock  industry. 
But  some  cover  a  wider  range  of  products.  The  Michigan 
Potato  Growers'  Exchange  sold  2,200  cars  of  potatoes  in 
1920,  and  in  addition  to  these  it  sold  several  hundred  carloads 
of  celery,  onions,  cabbage,  squash,  and  other  vegetables,  and 
hundreds  of  cars  of  fruit,  such  as  pears,  apples,  and  plums.29 
In  addition  to  these  it  marketed  grain,  beans,  hay,  and  straw. 
The  Exchange  also  has  a  purchasing  department  which  does  a 
large  business.  As  a  rule  federations  do  not  operate  on  a 
merchant  basis.  This  would  involve  the  necessity  of  raising 
large  sums  of  money  as  well  as  the  establishment  of  effective 
credit  relations  with  banks.  More  often  they  operate  on 
what  is  practically  a  commission  basis,  with  the  difference 
that  any  profits  belong  to  the  farmers  themselves. 

The  California  Fruit  Growers'  Exchange. — The  best  exam- 
ple of  federation  is  found  in  the  California  citrus  fruit  in- 
dustry. The  basis  of  the  largest  organization  is  some  10,500 
growers  of  citrus  fruits  in  the  state  who  are  organized  in  over 
200  local  associations  of  from  40  to  200  members  each.  Each 
local  association  commonly  picks  and  "assembles  the  fruit  in 
the  packing  house,  and  there  grades,  packs,  and  prepares  it 
for  shipment,"  30  and  each  has  brands  under  which  it  sells  its 

29  Whereas  the  average  grower  or  local  association  would  have  shipped 
to  Chicago  or  Detroit,  the  nearest  large  markets,  it  sold  less  than  25 
carloads  in  these  markets,  shipping  rather  to  smaller  and  less  known 
markets.    The  reason  assigned  is  that  in  seasons  of  heavy  production, 
these  cities  are  dumping  grounds  for  fruits  and  vegetables. 

30  This  brief  description  is  adapted  mainly  from  a  report  by  Mr.  G. 
Harold  Powell,  General  Manager  of  the  California  Fruit  Growers'  Ex- 
change, included  in  George  K.  Holmes,  Systems  oj  Marketing  Farm 
Products,  Report  No.  98  of  the  U.  S.  Department  of  Agriculture,  pp. 
169-171.    I  am  indebted  to  Mr.  Paul  S.  Armstrong,  advertising  manager 
of  the  Exchange,  for  the  statistical  data  and  for  more  recent  informa- 
tion on  the  organization  features.     A  more  extended  discussion  may 
be  found  in  W.  W.  Cumberland,  Cooperative  Marketing  as  Exemplified 
in  the  California  Fruit  Growers'  Exchange  (1917),  (Princeton  University 


252  PRINCIPLES  OF  MARKETING 

product.  Each  association  uses,  also,  the  brand  of  the  central 
exchange — "Sunkist" — which  appears  on  the  wrappers  and  by 
which  the  fruit  is  known  to  consumers.  The  local  brand  ap- 
pears only  on  the  box.  There  are  twenty  district  exchanges, 
each  of  which  is  the  medium  of  communication  with  the  cen- 
tral exchange  in  the  sale  of  the  products  of  the  local  associa- 
tions which  belong  to  it.  They  also  procure  cars,  receive  and 
divide  the  returns  among  the  local  associations,  and  generally 
represent  them  with  the  central  exchange  in  the  handling  of  the 
larger  problems  of  the  industry. 

The  Central  Exchange. — The  California  Fruit  Growers' 
Exchange  was  formed,  and  is  controlled,  by  the  district  ex- 
changes. Its  main  function  is  to  furnish  marketing  facilities 
at  cost.  In  doing  this  it  places  bonded  agents  in  the  main 
markets  of  the  United  States  and  Canada,  gathers  informa- 
tion of  the  market,  is  informed  by  telegraph  of  the  sale  of  each 
car  of  fruit,  and  furnishes  information  to  the  local  exchanges 
and  associations  through  the  medium  of  a  daily  bulletin.  It 
"takes  care  of  litigation  that  arises  in  connection  with  the 
marketing  of  the  fruit;  handles  all  claims;  conducts  an  exten- 
sive advertising  campaign  to  increase  the  demand  for  citrus 
fruit";  and  develops  new  markets.  "The  exchange  maintains 
district  managers  in  all  important  cities  of  the  United  States 
and  Canada.  These  employees  are  exclusively  salaried  agents 
engaged  only  in  the  sale  of  fruit,  in  the  development  of  mar- 
kets, and  in  handling  the  local  business  problems  of  the  Ex- 
change." 

It  appears  that  even  this  large  organization  does  only  what 
a  large  independent  concern  would  do  in  its  marketing  ac- 
tivities, what  in  fact  some  large  concerns  are  doing,  although 
their  activities  are  not  usually  so  intimately  connected  with 
the  growers'  own  farm  problems  as  are  those  of  the  local  ex- 
Press)  ;  or  in  J.  W.  Lloyd,  "Cooperative  and  Other  Organized  Methods 
of  Marketing  California  Horticultural  Products,"  University  of  Illinois 
Studies  in  the  Social  Sciences  (1919). 


DISTRIBUTIVE  COOPERATION 


253 


changes.31  But  this  exchange  was  formed  to  meet  a  peculiar 
problem — the  lack  of  a  market  large  enough  to  take  the 
growers'  products  at  a  profitable  price — a  problem  which  had 


10,500  Producers  in 
200  local  associations 


Auction 


Jobber 


Retailer 


Consumer 


20  District 
Exchanges 


California 
Fruit  Growers  Exchange 


DIAGRAM  V.— Cooperative  Fruit  Marketing  by  California  Fruit  Growers 

not  been  solved  for  the  growers  by  existing  marketing  agencies, 
but  which  they  have  apparently  solved  successfully  through 
their  cooperative  enterprise.32  Its  chief  tasks,  in  contrast 

31  Apples  in  New  England  and  in  other  sections,  however,  are  often 
picked  by  independent  buyers. 

82  In  1907  the  Association  began  advertising  to  widen  the  orange  mar- 
ket. "In  the  twelve  years  since  the  first  Sunkist  campaign  was  launched 
in  Iowa,  the  consumption  of  California  oranges  has  doubled.  The 


254  PRINCIPLES  OF  MARKETING 

with  those  of  most  growers'  marketing  organizations,  have 
been  to  create  a  larger  demand  for  the  growers'  produce,  and 
to  maintain  proper  methods  of  physical  distribution  for  their 
highly  perishable  products  grown  far  from  the  important 
markets.33 

United  States  Grain  Growers  Incorporated. — Perhaps  the 
most  ambitious  project  ever  aimed  at  the  control  of  wholesale 
marketing  by  the  growers  themselves  is  the  United  States 
Grain  Growers  Incorporated,  organized  in  the  spring  of  1921. 
This  association  arose  out  of  the  activities  of  the  so-called 
"Committee  of  Seventeen"  appointed  by  President  Howard  of 
the  American  Farm  Bureau  Federation.34  The  plan  adopted 
by  this  committee  after  six  months'  investigation,  beginning 
in  August,  1920,  led  to  the  adoption  of  a  plan  for  marketing 
the  grain  crop  of  the  country.  The  proposed  program 
has  been  outlined  by  the  Committee,  as  follows: 

"Grain  selling  will  be  concentrated  in  the  hands  of  a  national 
sales  association,  with  membership  and  voting  control  limited  to 
actual  grain  growers.  This  sales  association  will  establish  branch 
offices  at  all  principal  grain  markets,  including  seats  on  boards  of 
trade  if  they  are  found  to  be  desirable.  It  will  establish  a  com- 
plete system  of  gathering  and  interpreting  statistics  of  world  con- 
ditions affecting  supply  and  demand.  It  will  provide  adequate 
means  for  financing  orderly  grain  marketing  through  a  subsidiary 
finance  corporation.  A  subsidiary  warehouse  corporation  will 
provide  terminal  and  district  warehouses  with  cleaning  and  condi- 

American  consumer  has  been  taught  by  cooperative  advertising  to  eat 
nearly  twice  as  many  oranges  as  before."— Don  Francisco,  Cooperative 
Advertising,  p.  8.  (This  is  a  pamphlet  published  by  the  Exchange.) 

33  For  a  further  discussion  of  these  points  see  Carl  C.  Plehn,  "The 
State  Market  Commission  of  California,"  American  Economic  Review, 
Vol.  VIII  (March,  1918),  pp.  1-27. 

34  The  farm  bureaus  of  the  various  states  have  been  exercising  a  wide 
influence  on  agriculture.    Among  other  things  they  have  been  promi- 
nent in  organizing  local  cooperative  associations.    See  American  Farm 
Bureau  Organization,  What  Is  It?,  published  by  the  Federation,  58  So. 
Wabash  Avenue,  Chicago;  also  0.  M.  Kile,  The  Farm  Bureau  Move- 
ment (1921). 


DISTRIBUTIVE  COOPERATION  255 

tioning  machinery.     An  export  corporation  .  .  .  will  find  foreign 
outlets  for  surplus  grain.  .  .  . 

"The  best  features  of  all  successful  cooperative  marketing  com- 
panies have  been  included  in  the  new  marketing  plan.  .  .  .  The 
plan  makes  no  attempt  to  put  grain  marketing  at  once  on  a  nation- 
wide pooling  basis,  but  provides  means  for  the  development  and 
extension  of  pooling  as  experience  proves  its  adaptability  to  the 
grain  business."  M 

Under  the  Committee's  plan,  existing  cooperative  elevators 
and  such  new  associations  as  may  be  formed  can  become  an 
integral  part  of  the  new  organization.  In  this  way  it  is  hoped 
that  the  thousands  of  these  elevators  now  in  existence  will 
prove  to  be  a  nucleus  about  which  the  new  organization  can 
build.  This  will  help  to  start  operations  on  a  large  scale  at 
once.  Almost  no  changes,  other  than  the  method  of  control 
of  the  wholesale  machinery,  are  proposed  in  the  existing 
market  machinery.  Furthermore,  it  is  held  to  be  unnecessary 
"to  secure  contracts  covering  a  large  percentage  of  the  grain 
of  the  United  States  before  the  sales  association  can  begin 
to  operate."  36 

The  national  organization  is  governed  by  a  board  of  twenty- 
one  directors,  elected  by  representatives,  who  are  in  turn 
elected  from  various  districts.  The  board  appoints  the 
business  managers  of  the  organization.  The  present  plan  in- 
volves a  contract  between  the  central  agency  and  the  local 
association  whereby  the  latter  agrees  to  deliver  for  a  period 
of  five  years  all  grain  received  from  farmers  who  belong  to 
the  national  organization.  There  is  also  a  plan  whereby  the 
grain  of  several  associations  may  be  sold  at  the  discretion  of 
the  central  body  and  the  proceeds  pooled  on  the  basis  of  the 
quantity  of  grain  each  association  ships.37 

39  Outlined  Explanation  of  the  Proposed  Grain  Marketing  Plan  of 
the  Farmers'  Grain  Marketing  Committee  oj  Seventeen,  published  by 
the  Committee,  58  E.  Washington  Street,  Chicago,  March,  1921,  p.  1. 

36  Ibid.,  p.  5. 

37  The  plan  of  the  new  National  Live  Stock  Producers'  Association  is 
described  in  the  Live  Stock  Marketing  Plan  of  the  Farmers'  Live  Stock 
Marketing  Committee  of  Fifteen,  608  So.  Dearborn  Street,  Chicago. 


256  PRINCIPLES  OF  MARKETING 

Costs. — So  far  as  the  expenses  of  operation  are  concerned 
it  is  likely  that  little  is  saved  through  cooperation.  A  man- 
ager capable  of  running  the  organization  with  success  is  likely 
to  require  a  salary  as  great  as  that  received  by  the  inde- 
pendent owner  in  profit.38  It  is  likely,  furthermore,  that  the 
lack  of  the  profit  incentive  may  weaken  his  efforts.  The  in- 
vestment will  be  as  great,  and  so  the  interest  on  the  money 
invested  must  be  as  much,  as  the  private  dealer  would  expect 
on  his  own  investment.  There  is  little  reason  to  believe  that 
other  costs — help,  depreciation,  running  expenses — will  be  gen- 
erally lower  for  the  farmer  association.  There  are  instances, 
however,  in  which  these  may  be  lower.  For  example,  there 
are  often  too  many  local  grain  elevators.  No  one  of  them  is 
operating  at  a  sufficient  capacity  to  reduce  costs  to  the  low 
point  a  larger  business  can  reach.  By  substituting  one  large 
business  it  seems  that  the  farmer  association  may  sometimes 
achieve  real  economies. 

Furthermore,  associations  have  often  been  formed  at  points 
where  no  efficient  market  organization  of  any  kind  existed. 
Each  farmer  marketed  his  own  product  through  sale  or  con- 
signment to  the  consumer,  retailer,  or  central  market  dealer. 
At  such  points  cooperation  may  accomplish  results  similar  to 
those  that  follow  the  establishment  of  an  independent  middle- 
man: i.e.,  transportation  costs  may  be  lowered  by  the  com- 
bination of  shipments  into  carload  lots;  individual  farmers  are 
relieved  of  the  bother  of  attending  to  all  the  details  of  mar- 
keting their  own  products;  and  the  knowledge  and  bargaining 
of  a  market  specialist  are  substituted  for  the  limited  knowl- 
edge of  the  average  farmer. 

Combating  Specific  Evils. — More  frequently,  however, 
farmers'  selling  associations  have  been  formed  to  compete  with 
or  to  "eliminate"  local  dealers  where  it  was  felt  that  the  farm- 
ers had  a  grievance  against  the  independent  middleman.  Very 
often  a  single  dealer  monopolized  the  shipping,  or  a  group  of 

38  Many  independent  elevators,  however,  are  also  managed  by  hired 
employees. 


DISTRIBUTIVE  COOPERATION  257 

dealers  were  thought  to  have  an  understanding  whereby  they 
kept  prices  down.  That  is,  the  margin  taken  out  by  the 
middleman  was  felt  to  be  larger  than  was  necessary  to  cover 
the  costs  of  marketing  and  to  allow  him  a  reasonable  profit. 
Local  merchants  have  also  been  charged»with  keeping  the  price 
down  by  paying  a  uniform  price  for  all  grades,  and  of  uni- 
formly grading  the  product  too  low  or  deducting  too  much 
for  tare.39  It  is  in  such  cases  as  these  "that  there  is  often 
real  truth  in  declaring  that  the  "profits"  of  the  middleman 
are  saved. 

Finally,  the  individual  farmer  is  often  at  a  disadvantage 
in  bargaining.  This  has  been  true,  for  example,  in  the  sale 
of  milk  to  city  milk  dealers.  The  organization  of  milk  pro- 
ducers' associations  has  greatly  strengthened  the  farmers' 
bargaining  position.40 

Social  Results. — The  social  benefits  which  result  from  the 
organization  of  an  association  may  be  fully  as  important  as 
the  direct  results.  Individualism  is  modified  in  the  interest 
of  community  endeavor,  a  community  spirit  develops,  and  the 
association  of  farmers  in  a  business  venture  reacts  beneficially 
upon  their  individual  business  methods. 

"Orderly  Marketing"  and  "Stabilization"  of  Price. — 
When  cooperative  associations  federate  to  perform  wholesale 
functions  the  results  are  likely  to  be  much  as  have  been  de- 
scribed. But  one  important  feature  of  the  recent  discussions 
of  cooperative  wholesaling  deserves  notice.  That  is  the  effort 
to  "stabilize"  prices  through  "orderly  marketing."  This  may 
be  done,  in  the  first  place,  by  influencing  production  so  that 
it  will  accord  more  nearly  to  the  demands  of  the  market,  as 
forecasted  by  the  central  organization.  In  the  second  place, 
this  may  be  done  by  controlling  the  marketing  of  the  crop 
so  that  commodities  will  go  to  the  best  markets  at  the  most 
favorable  times.  Gluts  and  shortages  will  tend  thereby  to  be 

39  See  the  Report  of  the  Federal  Trade  Commission  on  the  Grain 
Trade,  Vol.  I  (1920),  pp.  100,  198 ff. 
40 See  H.  E.  Erdman,  The  Marketing  oj  Whole  Milk  (1921),  Chap.  V. 


258  PRINCIPLES  OF  MARKETING 

eliminated,  whether  they  be  seasonal  or  temporary.  The  price 
will  be  "stabilized." 

If  a  large  proportion  of  any  crop  were  controlled  in 
this  way  it  seems  reasonable  to  believe  that  these  results 
would  follow.  If  the  power  were  properly  exercised  the  re- 
sults might  prove  favorable  to  both  producers  and  consumers. 
Uniform  supply  and  stabilized  prices  are  generally  believed  to 
be  desirable.  It  is  this  which  some  of  the  associations  of  fruit 
growers  and  of  walnut  and  cranberry  growers  have  already  ac- 
complished, and  it  is  this  which  the  Grain  Growers  Incor- 
porated hopes  to  accomplish.41 

Failures. — There  have  been  many  failures  in  the  coopera- 
tive movement.  Associations  have  been  formed  where  no  need 
existed.  Grain  elevators  have  been  built  where  the  existing 
dealers  were  giving  excellent  service  at  a  reasonable  profit. 
Associations  have  been  organized,  sometimes  with  unfortunate 
results,  by  professional  promoters  whose  interests  were  not  al- 
ways those  of  the  farmers.  Again,  the  competing  dealers,  par- 
ticularly the  great  "line"  elevators  of  the  grain  business,  have 
used  strenuous  means  to  ruin  the  cooperatives,  many  times 
with  success.  In  the  failure  of  many  associations  the  lack  of 
loyalty  on  the  part  of  members  has  played  a  large  part.  If  a 
competing  dealer  offers  a  slightly  higher  price  many  farmers 
immediately  desert  their  own  organization.  They  will  do  so 
even  though  they  may  be  assured  that  if  the  cooperative  plan 
fails  they  will  thereafter  receive  a  smaller  payment  for  their 

41  The  legal  status  of  such  efforts  under  the  anti-trust  laws  has  yet  to 
be  determined.  See  Asher  Hobson,  "Farmers'  Cooperative  Associa- 
tions," American  Economic  Review,  Vol.  XI  (June,  1921),  pp.  221-226. 
In  this  connection  the  following  excerpt  from  an  article  in  The  Market 
Reporter  of  June  18,  1921,  is  of  interest:  "The  growers  in  the  valley 
[Imperial  Valley]  have  again  undertaken  to  restrict  the  movement  of 
Ponys  to  market  and  have  tentatively  agreed  that  after  June  9  no 
more  Ponys  will  be  offered  for  shipment.  It  is  contended  that  the 
Pony  melon  lacks  the  quality  of  the  Standards  and  since  it  is  apparent 
that  there  will  be  sufficient  Standards  to  meet  the  demand  of  the 
consuming  public,  the  distributors  are  inclined  to  favor  the  move  on 
the  part  of  the  growers." 


DISTRIBUTIVE  COOPERATION  259 

crops.  It  is  further  claimed  that  the  railroads,  often  finan- 
cially interested  in  the  business  of  the  great  "line"  companies, 
have  sometimes  discriminated  against  the  farmers  by  refusing 
to  allow  them  to  put  in  sidetracks  and  by  failing  to  allot 
cars  when  they  were  most  needed. 

Bad  Management. — The  problem  of  securing  competent 
managers  has  proved  a  fruitful  source  of  difficulty.  Farmers 
themselves  have  often  been  unable  to  direct  the  organization 
properly  because  of  the  lack  of  time  or  ability.  They  have 
been  unwilling,  moreover,  to  pay  enough  to  hire  a  suitable 
manager.42  In  this  connection,  however,  it  should  be  remem- 
bered that  the  failure  rate  'among  independent  merchants  is 
also  great.  Education  through  failures,  through  state  asso- 
ciations, cooperative  publications,  and  the  efforts  of  state  col- 
leges and  of  the  United  States  Department  of  Agriculture,  and 
more  recently  through  the  farm  bureaus,  is  doing  much  to 
remove  these  difficulties. 

Results. — The  continued  growth  of  these  organizations 
seems  to  prove  that  they  are  a  real  benefit  to  their  producer 
members.43  Their  development  may  be  likened  in  many  re- 
spects to  the  movement  toward  direct  marketing  of  manufac- 
tured products.  For  cooperative  associations  are  operated  in 
the  interest  of  the  growers,  just  as  direct  marketing  by  manu- 
facturers aims  to  control  marketing  in  the  producer's  inter- 
est. Even  in  the  matter  of  demand  creation  growers  of  spe- 
cialties, such  as  the  California  and  Florida  citrus  fruit  grow- 
ers and  walnut  growers  and  the  Washington  apple  growers, 

"The  farmer's  net  cash  income  is  usually  small.  A  large  part  of  his 
real  income — house,  use  of  his  automobile,  garden,  etc. — he  does  not 
always  consider  a  part  of  his  income.  The  salary  demanded  by  a  good 
manager  commonly  seems  to  him,  consequently,  to  be  excessive. 

43  The  latest  discussion  of  the  cooperative  movement  in  the  grain 
trade  will  be  found  in  the  Report  of  the  Federal  Trade  Commission  on 
the  Grain  Trade,  Vol.  I,  1920;  among  other  recent  discussions  of  coop- 
eration in  agriculture  are  part  III  of  B.  H.  Hibbard,  Marketing  Agri- 
cultural Products  (1921),  and  Chaps.  XII,  XIII,  and  XVIII  of  Theo- 
dore Macklin,  Efficient  Marketing  for  Agriculture  (1921). 


260  PRINCIPLES  OF  MARKETING 

have  a  problem  similar  to  that  of  many  manufacturers.  A 
very  real  gain,  furthermore,  has  resulted  from  improved  grad- 
ing, which  has  brought  improved  agriculture,  as  well  as  in- 
creased prices.  Farmer  control  has  increased  the  likelihood  of 
the  growers  receiving  a  price  for  their  goods  which  is  more 
nearly  in  accord  with  the  market  price.  In  many  cases, 
farmers  have  established  shipping  associations  where  no  inde- 
pendent organization  existed  but  where  there  was  a  real  need. 
In  other  cases,  the  business  of  the  farmers  has  been  largely 
concentrated  in  the  hands  of  the  cooperative.  This  has  often 
reduced  the  expense  of  marketing  because  previously  it  had 
been  divided  among  a  number  of  competing  dealers,  each 
operating  on  a  small  scale  and  at  a  high  cost. 

II.    CONSUMER  COOPERATION 

History  of  the  English  Movement. — The  modern  coopera- 
tive movement  on  the  part  of  consumers  was  begun  in  Eng- 
land in  1844  when  a  few  workmen  formed  the  Rochdale  Society 
of  Equitable  Pioneers.4*  Starting  with  a  single  store  and  with 
a  capital  of  £28  they  bought  a  stock  of  goods  and  sold  flour, 
butter,  oatmeal,  and  sugar.  The  store  did  a  small  business 
and  led  a  precarious  life  for  some  years,  but  it  gradually 
achieved  sufficient  success  to  prompt  the  growth  of  a  number 
of  imitators  in  communities  near  by.  By  1851  there  were  150 
such  stores  in  the  north  of  England  and  in  Scotland.  In  1852 
the  Rochdale  pioneers  entered  the  field  of  production  and 
started  to  manufacture  shoes  and  clothing.  Gradually,  either 
alone  or  in  cooperation  with  other  stores,  other  products  were 

44  In  the  United  States  the  Civil  War  disrupted  many  cooperative 
enterprises  which  were  just  being  established.  The  Lowell  Cooperative 
Association  was  established  in  1876  and  is  still  doing  business.  For  a 
brief  summary  of  the  American  movement  and  a  more  detailed  state- 
ment of  its  present  status  among  farmers,  see  0.  B.  Jesness  and  W.  H. 
Kerr,  Cooperative  Purchasing  and  Marketing  Organizations  among 
Farmers  in  the  United  States,  U.  S.  Department  of  Agriculture,  Bui. 
No.  547  (1917). 


DISTRIBUTIVE  COOPERATION  261 

manufactured  and  the  variety  of  goods  handled  in  the  stores 
increased.  Finally,  in  1855  a  wholesale  department  was 
started  by  the  Rochdale  store  and  some  of  its  neighbors. 

Cooperative  Wholesaling. — In  1863  the  North  of  England 
Cooperative  Wholesale  Society  was  established,  the  stock  of 
which  was  held  by  forty-five  local  societies.  This  organization 
grew  rapidly.  Buying  branches  were  established  as  the  busi- 
ness grew  and  in  1873  the  manufacture  of  biscuits  and  sweets 
was  begun. 

"Today  the  Annual  of  the  Cooperative  Wholesale  Society  shows 
that  it  has  five  clothing  factories,  eight  great  flour  mills,  woolen 
cloth  works,  cocoa  and  chocolate  works,  soap,  candle,  glycerine, 
lard,  starch  and  blue  works,  furniture,  bedding  and  cartwrighting 
factories,  printing,  bookbinding  and  lithographic  works,  preserve, 
candied  peel  and  pickle  works  and  vinegar  brewery,  shirts,  mantle, 
and  underclothing  factory,  cap  and  umbrella  making  factories, 
and  that  it  also  manufactures  overalls  and  shirts,  drugs,  pinafores 
and  blouses,  leather  bags,  cigars,  and  tobacco,  flannels  and  blan- 
kets, corsets  and  hosiery,  paints,  varnish  and  colors,  brushes  and 
mats,  hardware  and  tinplate,  butter  and  margarine."  4 

Failures  and  Successes. — Many  enterprises  have  failed, 
many  stores  have  failed,  but  the  movement  has  grown  and 
prospered  generally  until  in  1915  the  Cooperative  Wholesale 
Society  had  investments  and  assets  of  over  $38,000,000;  de- 
posits and  withdrawals  in  its  banks  were  $1,347,678.  A  co- 
operative insurance  company  carries  the  fire  insurance  of  the 
societies,  a  health  insurance  section  has  165,000  members.  The 
society  now  has  factories,  farms,  plantations,  and  buying  agents 
all  over  the  world. 

A  similar  society  in  Scotland  has  had  a  like  growth  and  in 
some  large  undertakings  the  two  concerns  cooperate.  But  the 
movement  is  not  confined  to  Great  Britain.  In  one  form  or 
another  it  is  found  on  the  continent.  There  has  been  a  re- 
markable growth  of  consumer  cooperation  in  Germany,  France, 

45  E.  P.  Harris,  Cooperation,  The  Hope  of  the  Consumer  (1918),  pp. 
222-223. 


262  PRINCIPLES  OF  MARKETING 

Belgium,  Denmark,  and  other  European  countries,  a  move- 
ment which  appears  to  have  been  accelerated  by  the  World 
War.46  These  continental  selling  organizations  are  like  that 
in  England,  with  local  stores,  central  wholesale  stores,  and 
control  of  the  production  of  important  products.  In  some  in- 
stances the  cooperatives  have  coped  with  great  combinations, 
bringing  them  to  terms  or  establishing  their  own  plants  in  suc- 
cessful competition.  There  are  twenty-four  wholesale  so- 
cieties in  Europe.  Of  these  there  were  five,  each  of  which  did 
an  annual  business  of  over  $40,000,000  in  1916.47 

The  Nature  of  Consumer  Cooperation. — As  Harris  puts 
it,  the  early  cooperators  desired  (1)  to  get  honest  goods  as 
cheaply  as  possible,  (2)  through  the  medium  of  a  democrati- 
cally controlled  association,  (3)  operating  in  its  purchases  and 
sales  as  the  representative  of  the  buyer  rather  than  of  the 
seller.48  They  did  not  associate  themselves  for  profit,  as  do 
the  organizers  of  the  ordinary  mercantile  establishment,  but  to 
procure  low  prices  to  the  consumer. 

Cooperation  thus  attempts  to  replace  the  "push"  of  the 
profit-seeking  merchant  by  the  "pull"  of  the  consumer,  and 
whereas  the  aim  of  the  merchant  is  to  make  a  high  net  profit, 
the  cooperative  store  aims  to  procure  good  goods  for  its  own- 
ers at  low  cost.49  To  assure  consumer  control  of  the  store  and 

46  The  English  Wholesale  Society's  business  in  1917  amounted  to  over 
$300,000,000.  See  pamphlet  by  Albert  Sonnichsen,  Consumers  Coop- 
erating During  the  War,  published  by  the  Cooperative  League  of  Amer- 
ica, 2  West  13th  Street,  New  York  City,  November,  1917. 

"  The  story  of  the  growth  of  European  consumer  cooperation  is  most 
interesting,  and  it  has  been  presented  to  the  world  in  excellent  form 
by  its  many  admirers.  See  E.  P.  Harris,  Cooperation,  The  Hope  of  the 
Consumer  (1918) ;  Albert  Sonnichsen,  Consumers'  Cooperation  (1919) ; 
also  various  references  mentioned  in  James  Ford's  "Annotated  Bibli- 
ography of  Consumers'  Cooperation,"  The  Survey,  Vol.  39  (Feb.  9,  1917), 
pp.  517-18  (reprinted  by  the  Cooperative  League  of  America) ;  and 
Sidney  and  Beatrice  Webb,  The  Consumers'  Cooperative  Movement 
(1921). 

48  E.  P.  Harris,  op.  cit.t  pp.  88-94. 

49  "The  profits  of  merchandising  which  should  be  saved  to  the  con- 


DISTRIBUTIVE  COOPERATION  263 

to  maintain  interest  in  its  activities  the  plan  was  early  adopted 
of  paying  dividends  on  the  amount  of  the  purchases  each  in- 
dividual cooperator  made  rather  than  on  the  amount  of  stock 
he  owned.  Furthermore,  each  shareholder  is  allowed  but  one 
vote  no  matter  how  many  shares  he  may  own.  The  market 
rate  of  interest  is  paid  on  the  stock,  and  any  surplus  above 
that  is  divided  on  the  basis  of  purchases.  These,  it  will  be 
seen,  are  the  fundamental  features  of  cooperation. 

The  prices  at  which  goods  are  sold  are  substantially  the 
same  as  are  those  in  competing  stores,50  so  that  the  consumer 
benefits  financially  only  at  the  end  of  the  year  when  the  books 
are  balanced,  and  necessary  expenses  paid,  and  reserves  set 
up.  What  then  remains  of  the  surplus  is  divided  on  the  basis 
of  the  patronage  received..  This  price  policy  has  proved  to 
be  a  strong  feature  of  English  cooperation.  Because  they 
sell  at  the  same  price  as  competing  retail  stores, "THeTEnglish 
cooperative  societies  avoid  some  of  the  opposition  always  felt 
toward  price-cutters.  But  of  greater  importance  is  the  fact 
that  this  policy  gives  the  store  a  stronger  financial  position. 
It  is  not  easy  to  tell  in  advance  just  what  price  will  cover 
costs,  nor  is  it  wise  to  hew  too  close  to  the  line.  To  have  a 
surplus  strengthens  the  store's  financial  structure  and  its  credit 
as  well.  Then,  again,  there  is  a  psychological  advantage  in 
the  system.  To  save  a  penny  here  or  two  there  seems  of  little 
moment,  but  to  receive  twenty,  thirty,  or  fifty  dollars  as  a 
patronage  dividend  once  a  year  indicates  more  clearly  the 
service  of  the  store  to  its  patron.  It  is  also  better  for  the 

sumer  are  not  so  much  as  the  downright  wastes — wastes  incident  to 
competition,  and  wastes  incurred  by  the  present  profit  store  to  attract 
but  not  to  serve  consumers;  all  sales  pushing,  for  instance,  beyond 
legitimate  enlightenment  of  the  consumer,  all  expenses,  in  short,  not 
necessarily  incurred  to  bring  goods  to  the  consumer." — Idem,  p.  63. 

80  See  Bexell,  Macpherson,  and  Kerr,  A  Survey  oj  Typical  Coopera- 
tive Stores  in  the  United  States,  U.  S.  Department  of  Agriculture,  Bui. 
No.  394  (1916),  p.  11.  The  particular  stores  with  which  the  English 
cooperatives  compete  are  the  "multiple  stores"  which  correspond  to  our 
chain  stores. 


264  PRINCIPLES  OF  MARKETING 

patron  to  receive  his  dividends  in  this  way.  A  sum  of  such 
size  to  a  family  of  small  means  has  often  been  the  nucleus  for 
a  respectable  bank  account,  a  home,  or  a  government  bond. 
Thrift  is  promoted. 

A  related  feature  of  the  English  cooperative  retail  stores 
is  the  cash  sale.  The  goods  generally  purchased  are  sold  only 
for  cash.  This  eliminates  the  investigation  of  credit  incident 
to  credit  sales,  as  well  as  the  loss  through  bad  debts,  and  the 
consumer  is  himself  protected -from  unthrifty  habits — a  service 
of  no  mean  importance  to  the  average  laborer,  of  whom  the 
cooperatives  have  been  largely  made  up.51 

Use  of  Surplus  above  Costs. — The  normal  practice  of  the 
English  societies  in  the  use  of  the  surplus  above  costs  is  as 
follows:  First  come  reserves  for  advertising  the  cooperative 
movement;  next,  reserves  for  educational  facilities  for  the 
members  and  their  families;  then,  for  extensions  and  for  the 
interest  on  the  capital  invested;  and  finally,  the  patronage 
dividend.52 

To  illustrate  the  financial  features  of  consumers'  coopera- 
tive stores  the  following  example  is  quoted.53  Assume  that  a 
store  society  with  $10,000  capital  has 

Sold  goods  to  its  members  in  a  year  amounting  to $100,000 

Made  a  gross  profit  of 25,000 

Paid  expenses  of 15,000 

And  has  what,  in  an  independent  store,  would  be  a  profit  of       10,000 

"Sales  at  competing  retail  prices  and  sales  for  cash  are  not  funda- 
mental features  of  consumer  cooperation.  In  fact,  many  stores,  particu- 
larly in  America,  endeavor  to  reduce  prices.  Important  economies  re- 
sult from  cash  sales  and  since  the  aim  of  cooperation  by  consumers  is 
usually  to  reduce  prices,  rather  than  to  improve  service,  they  prevail 
quite  universally. 

"Dividends  are  not  distributed  in  Belgium  but  are  used  for  certain 
group  activities,  including  the  Maisons  du  Peuple,  popular  social 
centers. 

68  E.  P.  Harris,  op.  cit.,  p.  89  ff. 


DISTRIBUTIVE  COOPERATION  265 

The  distribution  of  gains  might  be  as  follows: 

1.  Reserve  for  education   $    500 

2.  Other  reserve 500 

3.  Interest  on  stock,  6% 600 

4.  Dividend  on  purchases,   8%    8,000 


Total   distributed    9,600 

Surplus 400 

A  member  who  owned  $50  in  stock  and  had  purchased  goods 
to  the  amount  of  $500  would  receive: 

A  dividend  on  his  stock  at  6%   $  3 

8%  on  purchases   40 


Total . $43 

Integration. — But  the  cooperative  movement  has  not 
stopped  with  the  local  store.  In  the  effort  to  save  for  the 
store's  owner,  the  consumer,  it  became  evident  that  there  are 
great  advantages  to  be  obtained  from  controlling  the  chan- 
nels through  which  the  goods  are  procured.  By  combining 
their  purchases,  stores  can  buy  in  large  enough  quantities  to 
procure  better  prices  and  they  can  afford  to  hire  their  own 
buyers — experts — to  represent  them  in  the  producers'  market. 
Even  this  has  not  sufficed,  and  the  European  movement  has 
extended  to  the  control  of  manufacturers,  to  agriculture,  bank- 
ing, insurance,  and  even  to  the  ownership  and  operation  of 
ocean-going  vessels.54 

Economic  Aspects. — What  are  the  economic  advantages 
which  are  said  to  result  from  consumer  cooperation? 
The  cooperative  store  is  operated  in  the  interest  of  the  con- 
sumer and  is  controlled  by  him.  Its  main  activity  is 
the  purchase  of  goods  for  the  consumer,  whereas  in  the  or- 
dinary merchandise  establishment  goods  are  purchased  when 
the  consumer  demands  them  or  when  the  proprietor  feels  that 
he  can  make  a  profit  from  their  resale.  The  profit  element 

54  In  the  United  States  a  considerable  volume  of  purchasing  is  done 
by  cooperative  grain  elevators  and  similar  cooperative  selling  organiza- 
tions for  their  patrons;  see  Jesness  and  Kerr,  op.  cit. 


266  PRINCIPLES  OF  MARKETING 

is  lacking  in  the  cooperative  store,  and,  if  the  management  is 
equally  good,  this  is  its  economic  strength.  The  retailer  at  his 
worst  is  tempted  to  shortweight,  to  overcharge,  or  to  oversell 
in  order  to  make  a  profit,  but  the  cooperative  store  at  its 
best  aims  to  get  what  the  consumer  wants  at  the  lowest  pos- 
sible price  consistent  with  the  quality  and  service  desired.  As 
the  management  is  controlled  by  the  consumer,  the  latter  is 
represented  in  the  producer's  market  by  a  skilled  buyer  with 
the  consumer's  point  of  view,  working  in  the  consumer's  in- 
terest. 

Any  savings  which  result  from  doing  away  with  the  middle- 
man's profit,  through  quantity  discounts,  direct  purchases  from 
producers,  or  from  the  elimination  of  expensive  methods  of 
demand  creation,  go  to  the  consumer.  This  is  important.  For 
in  the  competitive  market  organization  it  is  by  no  means  cer- 
tain that  such  gains  benefit  the  consumer.  The  results  of 
superior  merchandising,  whether  wholesaling  or  retailing, 
are  not  likely  to  be  passed  on  to  the  consumer  to  any  greater 
degree  than  is  necessary  to  keep  his  patronage  and  to  meet 
competition.  The  remainder  quite  properly  goes  to  swell  the 
profits  of  the  superior  merchant.55 

Some  Selling  Costs  Cut  Down. — It  is  undoubtedly  possible 
for  cooperative  stores,  especially  when  many  units  are  working 
together,  to  save  some  of  the  selling  costs  of  the  competitive 
merchandising  organization  through  removing  "the  din  of  ag- 
gressive advertising  and  salesmanship."  Moreover,  in  so  far 
as  manufacture  and  wholesaling  are  integrated,  all  selling  ef- 

65  A  popular  error  which  is  of  .interest  should  be  commented  upon  at 
this  point.  It  is  often  assumed  that  the  firms  which  make  the  highest 
profits  in  a  given  field  are  "profiteers"  or  "grafters,"  whereas  in  a  com- 
petitive market  it  is  m  reality  the  high  profit  firms  that  are  the  greatest 
protection  to  the  consumer.  This  is  not  on  account  of  the  high  profits, 
but  of  what  they  indicate,  namely,  that  the  methods  of  such  firms  are 
superior  to  those  of  their  competitors.  It  is  they  who  are  able  and 
most  likely  to  lower  prices,  whereas  it  is  their  high  cost  but  low  profit 
competitors,  whose  product  is  necessary  to  meet  existing  demands,  that 
set  the  prices:  See  pp.  411-412. 


DISTRIBUTIVE  COOPERATION  267 

fort  directed  toward  wholesalers  and  retailers  may  be  entirely 
replaced  by  a  simple  form  of  announcing  new  products  with 
a  description  of  what  they  are.  Furthermore,  the  profit  in- 
centive which  so  frequently  manifests  itself  in  adulteration, 
underweight,  overcharge,56  is  not  so  evident  in  the  coopera- 
tive store,  and  such  deceptions  and  tricks  on  the  part  of 
producers  and  their  salesmen  as  prevail  can  be  detected  by 
the  cooperative  buyers  when  they  are  skilled  in  their  task.57 
It  is  also  likely  that  goods  go  by  a  more  direct  physical  route 
from  producer  to  consumer. 

The  "Cooperative  Spirit." — But  economic  advantages  do 
not  seem  to  be  the  only  means  through  which  the  coopera- 
tive movement  has  succeeded.  There  is  another  important 
factor  in  that  intangible  something  which  the  exponents  of 
the  cooperative  movement  have* sometimes  called  the  "coopera- 
tive spirit,"  a  spirit  which  appears  to  combine  patience  to 
wait  for  results  with  a  willingness  on  the  part  of  the  coopera- 
tors  to  stick  together  through  adversity.  Where  consumer 
cooperation  has  best  succeeded  it  has  had  for  its  patrons  thrifty 
persons,  realizing  the  need  for  small  savings,  living  in  the 
same  social  stratum  and  with  a  common  class  feeling.  This 
spirit  as  manifested  in  England  has  not  been  confined  to  the 
cooperators  alone,  but  is  also  manifest  on  the  part  of  the 
management. 

"Perhaps  nothing  impresses  an  American  as  more  striking  about 
this  great  business  than  the  oft-cited  fact  that  William  Maxwell, 
who  was  for  thirty  years  the  president  of  the  Scottish  Whole- 
sale, conducted  its  fifty-million-dollar-a-year  business  and  never 
demanded  a  higher  salary  than  $38  a  week."  5 

56  In  the  ordinary  retail  store  some  goods,  such  as  staples,  are  com- 
monly sold  at  cost  or  near,  but  many  others  with  the  values  of  which 
the  consumer  is  not  acquainted,  are  sold  on  large  margins.  Both  the 
ethics  and  the  desirability  of  this  are  now  disputed  points. 

"That  the  efforts  of  cooperative  managers  to  make  a  showing  will 
tend  in  this  direction  of  dishonest  practice  seems  likely,  and  undoubt- 
edly tends  in  some  degree  to  offset  the  advantages  mentioned.  This, 
however,  is  less  in  evidence  as  the  movement  grows  and  prospers.  9  ' 

68  E.  P.  Harris,  op.  cit.,  p.  225. 


268  PRINCIPLES  OF  MARKETING 

Mr.  Maxwell  is  said  to  have  been  only  one  of  many  who 
have  received  and  do  receive  their  recompense  not  in  private 
profit  but  in  public  service. 

Enthusiasts  declare  that  it  is  the  lack  of  this  spirit  which 
has  been  at  the  root  of  all  cooperative  failures.  Impartial  in- 
vestigations of  American  cooperation  have,  however,  unearthed 
more  concrete  reasons  for  the  many  failures  of  cooperation 
by  consumers  in  the  United  States. 

Weak  Elements  in  American  Consumer  Cooperation.  — 

(1)  The  lack  of  any  effective  central  organization  through 
which  to  handle  problems  which  could  be  solved  through  such 
an  association  has  been  one  cause  for  failure.59 

(2)  The  refusal  of  wholesale  houses  to  sell  the  coopera- 
tives has  been  another  source  of  weakness.60     Inasmuch  as 
American  cooperation  has  commonly  gone  no  further  than  thg 

ranfeatiuil   Uf   l'(Jld.'I 


nels  for  their  products,  they  could  not  possibly  expect  to  do 
more  than  save  the  net  profit  of  the  retailer,  and  pos- 
sibly some  of  his  costs  for  demand  creation  and  for  such 
services  as  the  cooperators  are  willing  to  perform  for  them- 
selves. In  the  case  of  small  stores  these  savings  and  these 
profits  are  usually  minor,  not  large  enough  to  appeal  to  the 
average  American  as  worth  while.61  With  wholesalers  re- 
fusing to  sell,  or  discriminating  against  them,  even  this  saving 
has  often  disappeared. 

"Only  recently  has  a  national  organization  been  attempted.  The 
Cooperative  League  of  America,  2  West  Thirteenth  Street,  New  York 
City,  serves  as  "a  National  Association  for  Cooperative  Unity  and 
Education." 

60  Of  approximately  60  stores  reporting  in  1916,  "It  is  interesting  to 
note  that  only  27  stores  believed  that  they  bought  at  the  lowest  price, 
while  11  said  positively  that  they  bought  at  a  disadvantage.    The  rea- 
sons given  were:   (1)  inability  to  take  advantage  of  discounts,  and  (2) 
in  a  few  cases,  discrimination  on  the  part  of  wholesale  houses  against 
the  cooperative  store."  —  Bexell,  Macpherson,  and  Kerr,  op.  cit.,  p.  14. 

61  At  any  rate  this  is  usually  accepted  as  true.    The  fact,  however,  that 
the  retailer's  share  of  the  consumer  price  is  usually  in  the  neighborhood 
of  one-third  may  in  the  end  prove  to  be  larger  than  necessary. 


DISTRIBUTIVE  COOPERATION  269 

(3)  In  the  United  States  there  has  been  an  absence  of  that 
social-economic  status  requiring  small  savings  and  of  the  con- 
sciousness on  the  part  of  large  numbers  of  a  social  kinship, 
which  appear  to  be  so  important  to  European  cooperation. 
Without  these,  the  movement  has  never  achieved  sufficient  size 
or  sympathy  to  carry  on  successfully  those  wholesaling  and 
producing   activities   which   have   been   so  essential   to  the 
success    of    European    cooperation,    and    from  which    alone 
could  result  those  substantial  savings  which  would  make  a 
wide  appeal  to  American  consumers.     It  seems  more  than 
possible  that  this  spirit  is  now  developing  among  large  num- 
bers of  the  classes  which  have  found  themselves  pinched  by 
the  rising  costs  of  living;  and  the  bitter  conflicts  over  wages 
and  working  conditions  of  recent  months  have  undoubtedly 
strengthened  such   a  feeling.62 

A  further  consideration  in  this  regard  is  the  fact  that 
American  populations  are  less  settled  than  are  those  of 
Europe.  They  move  about  too  much  to  develop  a  close  neigh- 
borhood feeling  or  a  sufficient  degree  of  confidence  in  their 
neighbors  to  make  them  willing  to  stake  much  in  such  an  en- 
terprise. Questions  of  nationality  also  enter  in,  and  the  •mix- 
ture of  races  in  many  of  our  industrial  centers,  with  its  ac- 
companying jealousies,  has  not  been  conducive  to  cooperative 
activity.  Cooperative  efforts  seem  to  thrive  best  where  there 
is  a  greater  community  of  interest.  Thus  the  Finns  and  other 
foreign  peoples  in  sections  of  Massachusetts.  Michigan,  North- 
ern Wisconsin,  and  Minnesota  have  developed  successful  co- 
operative stores.  This  may  also  account  for  the  fact  that 
mam-  cooperative  stores  in  the  United  States  are  found  in 
small  towns  and  are  largely  patronized  by  farmers. 

(4)  Another    weakness    of    consumer    cooperation    in   the 
United  States  is  the  failure  of  American*  tn  fppl  thpmppH  far 
the  small  savings  which  result  from  cooperation.     In  this  con- 
necTronr-rr  Should  "Be  said  TEa^-American  cooperative  stores 

"Several  labor  organizations  have  undertaken  cooperative  enter- 
prises. 


270  PRINCIPLES  OF  MARKETING 

have  until  recently  tried  to  show  immediate  results  through 
lowered  retail  prices.  The  very  small  saving  usually  possible 
on  an  individual  purchase  has  been  disappointing  to  the 
cooperator. 

(5)  There  is  frequently  a  lack  of  business  knowledge  on 
the  part  of  the  cooperators.    This  has  proved  to  be  the  great- 
est cause  of  failure.     In  this  last  connection,  a  recent  govern- 
ment investigation  has  shown  that  the  "precariousness"   of 
cooperative  mercantile  business  is  due  to  inefficient  accounting 
and  auditing  more  than  to  any  other  single  cause.63 

(6)  The  handicapping  of  American  stores  in  the  past  through 
lack  of  laws  recognizing  the  validity  of  the  cooperative  fea- 
tures of  one  vote  and  the  patronage  dividend  has  also  been 
a  cause  for  failure.   >Qrganized  as  cooperators  they  have  fre- 
quently lost  their  cooperative  nature  soon  after  their  organi- 
zation and  have  become  regular  commercial  organizations.^) 

^Bexell,  Macpherson,  and  Kerr,  op.  cit.,  p.  16. 


CHAPTER  XIV 
THE  ELIMINATION  OF  MIDDLEMEN 


The  attacks  on  "profiteering"  which  arose  out  of  the  high 
prices  incident  to  the  World  War  have  re-emphasized  the  re- 
current discussions  of  the  "enormous  profits"  of  middlemen,  of 
the  wastes  of  the  existing  distributive  system,  and  of  proposals 
for  its  reform1  This  type  of  discussion  is  always  present,  but 
it  becomes  more  insistent  during  periods  of  rising  prices.  /Thus, 
for  some  years  past,  agitation  for  the  "elimination  of  mid- 
dlemen" has  been  carried  on  from  the  standpoint  of  the  gen- 
eral consumer  and  of  the  farmer,  hitherto  the  two  great  un- 
organized groups  in  the  market.  I  Much  of  this  agitation  has 
been  confined  to  the  distribution  of  agricultural  products. 
But  unnoticed  by  the  public  and  even  opposed  by  it  when 
connected  with  the  "trust  movement,"  there  has  developed  a 
very  definite  elimination  of  middlemen  in  the  marketing  of 
manufactured  products — a  movement  which  has  perhaps  gone 
further  in  this  country  than  have  the  similar  movements  of 
farmers  and  consumers.  Moreover,  although  the  public  has 
evidenced  a  greater  interest  in  products  intended  for  the  retail 
trade,  the  greatest  amount  of  "direct"  trading  is  being  done 
with  production  goods,  equipment,  and  supplies2 — products 
which  are  either  raw  materials  for  manufacture,  semi-manu- 
factured raw  materials,  or  finished  products  intended  to  be 

1This  chapter  summarizes  parts  of  previous  chapters  in  order  to 
bring  together  the  facts  bearing  on  this  query,  It  thus  serves  as  a 
partial  summary  of  what  has  gone  before. 

2  See  Chaps.  VI  and  X. 

271 


272  PRINCIPLES  OF  MARKETING 

used  in  further  production.3  Wool,  cotton,  and  rubber  are 
examples  of  the  first  class  of  products;  yarn,  iron  ore,  and 
automobile  parts  are  representative  of  the  second;  and  ma- 
chinery is  a  good  example  of  the  third. 

Definition  and  Limitation. — There  are  many  types  of  mid- 
dlemen, operating  in  many  different  ways  and  under  varied 
conditions,  and  the  question  of  their  elimination  assumes  a 
variety  of  forms  not  usually  appreciated  by  the  uninitiated. 
Some  definition  and  limitation  of  the  subject,  therefore,  will 
clarify  the  discussion. 

The  bank,  the  railroad,  the  insurance  company,  and  other 
functional  agencies  are,  in  a  sense,  middlemen.  But  the  mid- 
dlemen in  question  are  of  the  two  classes  previously  consid- 
ered:4 those  who  take  title  to  goods  for  the  purpose  of  resale; 
and  the  functional  middlemen  of  purchase  and  sale  who  do 
not  take  title,  but  who  assist  directly  in  bringing  about  the 
transfer  of  title.5 

The  present  discussion  will  be  further  limited,  since  two 
distinct  problems  arise: 

1.  There  may  be  too  many  independent  middlemen  operating 

between  producer  and  consumer. 

2.  There  may  be  too  many  middlemen  of  each  type. 

3  See  pp.  7-9. 

4  Pp.  5-7. 

B  The  following  quotation  describes  the  first  type  of  middlemen  as 
they  operated  before  the  more  recent  changes  that  have  taken  place 
in  market  organization: 

"Each  took  the  risk  of  destruction  of  the  goods  while  he  held  title. 
Each  took  the  risk  of  credit  losses.  Each  took  a  share  in  the  trans- 
portation of  the  goods  along  the  route  from  the  producer's  stock  room 
to  the  hands  of  the  consumers.  Each  took  a  part  in  financing  the 
entire  operation.  Each  had  a  part  in  the  selling,  disposing  of  the 
goods  he  purchased  to  succeeding  middlemen  and  finally  to  the  con- 
sumer. And  each  finally  took  a  part  in  assembling,  assorting,  and 
re-shipping  the  goods  to  make  them  physically  available  to  the  con- 
sumer."— A.  W.  Shaw,  "Some  Problems  in  Market  Distribution,"  Quar- 
terly Journal  of  Economics,  Vol.  XXVI  (1912),  p.  731.  (Republished 
in  book  form  under  the  same  title.) 


THE  ELIMINATION  OF  MIDDLEMEN          273 

It  is  contended  that  some  products  go  through  the  hands 
of  more  independent  firms  than  their  most  effective  distribu- 
tion requires.  This  is  the  situation  most  often  in  mind  in 
current  discussions.  But  although  this  is  more  widely  dis- 
cussed, it  is  not  always  the  most  important  aspect  of  the 
question  of  eliminating  middlemen.  Many  careful  students 
hold  that  there  are  too  many  individual  firms  engaged  in  the 
work  of  each  step  in  marketing — too  many  country  shippers, 
commission  men,  brokers,  jobbers,  and  retailers.  This  in- 
volves the  question  of  determining  what  scale  of  operation  is 
most  effective.  No  attempt  will  be  made  at  this  point  to 
discuss  this  second  problem.6 

Nature  of  Criticism. — In  the  consideration  of  the  first  prob- 
lem there  are  two  types  of  criticism  of  the  middleman  sys- 
tem which  are  not  always  clearly  distinguished.  It  is  held 
that  the  cost  of  marketing  is  greater  than  it  should  be,  or  that 
the  service  is  inferior,  because  the  goods  go  through  "too  many 
hands."  And  it  is  further  maintained  that  so  much  machinery 
makes  it  possible,  somehow,  for  some  or  all  of  the  links  in  the 
chain  to  "take  out"  a  larger  profit  than  their  service  war- 
rants. Consequently,  it  is  asserted  that  this  profit  would  be 
saved  if  more  "direct"  methods  of  buying  and  selling  pre- 
vailed. Two  important  classes  of  argument  are  thus  advanced 
in  favor  of  eliminating  some  of  these  successive  middlemen. 
It  is  urged  (1)  that  bettej^service^  will  follow  at  the  same  or 
a  l^wer__cost,  or  that  lower  cost  will  prevail  for  the  same  or 
better  service;  and  it  is  also  asserted  (2)  that  jprojits  to  the 
middlemen  will  be  reduced  and  the  profit  accrue  to  producer 
or  consumer  in  the  form  of  higher  prices  to  the  former  and 
lower  prices  to  the  latter.7 

6  It  will  be  discussed  in  Chap.  XXVI. 

1  When  marketing  processes  are  combined  by  a  middleman,  any  re- 
sulting reduction  in  the  profits  of  the  integrated  steps  is  likely  to 
benefit,  in  part  at  least,  the  middlemen  absorbing  them  rather  than 
the  producer  or  consumer.  This  will  be  true  unless  competition  forces 
prices  up,  or  down. 


274  PRINCIPLES  OF  MARKETING 

Who  Can  Eliminate  Middlemen? — Middlemen  may  be 
eliminated  by  the  action  of  producers,  consumers,  or  other 
middlemen.  The  farmer  who  sells  his  produce  to  the  consumer 
has  passed  over  one  or  more'  possible  middlemen ;  the  manu- 
facturer who  utilizes  his  own  organization  for  reaching  the 
jobber  has  eliminated  an  agent  between  himself  and  the  jobber, 
and  if  he  sells  to  the  retailer  he  has  also  eliminated  the  jobber, 
and  if  he  sells  to  the  consumer,  he  has  gone  around  the 
retail  dealer  as  well.8  The  consumer  who  buys  from  the 
farmer,  the  cooperative  association  which  runs  a  retail  store, 
and  the  department  store,  chain  store,  or  mail  order  house 
which  buys  fiom  the  manufacturer,  as  well  as  the  jobber  who 
runs  his  own  retail  stores — these  have  all  eliminated  middle- 
men. They  are  themselves,  in  other  words,  performing  the 
functions  which  would  otherwise  be  performed  by  independent 
market  agencies.  Again,  the  market  functions  may  be  per- 
formed "directly"  only  in  part.  Manufacturers  of  staple  con- 
sumption goods,  in  particular,  ordinarily  utilize  the  services 
of  the  jobber  and  the  retailer  to  perform  some  of  the 
market  activities  necessary  to  the  distribution  of  their  prod- 
ucts, and  utilize  their  own  organization  for  the  re- 
mainder.9 

In  many  cases  it  is  not  quite  correct  to  say  that  a  middle- 
man has  been  "eliminated" ;  for  the  particular  farmer  or  manu- 
facturer may  never  have  sold  through  a  middleman.  But  the 
determination  to  sell  direct  involves  a  choice  of  methods.10 
It  involves,  consequently,  much  the  same  result  in  method  and 

8  It  should  be  kept  in  mind  that  many  manufactured  products  are 
not  made  for  immediate  consumption,  but  are  sold  to  other  manufac- 
turers for  further  change  or  for  use  in  making  other  products. 

9  See  Chaps.  VIII  and  X. 

10  At  this  point  it  will  lead  to  a  better  understanding  of  the  points  at 
issue  to  review  the  marketing  functions.    See  Chaps.  I  and  II.    In  his 
article  "Some   Problems   in   Market   Distribution,"   A.   W.   Shaw  calls 
them  "functions  of  middlemen,"  Quarterly  Journal  oj  Economics,  Vol. 
XXVI  (1912),  p.  731. 


i 


THE  ELIMINATION  OF  MIDDLEMEN          275 

in  market  influence   as   though   middlemen   had   been  used 
earlier  and  then  discarded.11 

The  actual  status  of  the  middlemen  in  different  types  of 
marketing  has  been  discussed  from  time  to  time.12  It  remains 
to  summarize  the  conclusions  of  previous  chapters  in  so  far  as 
they  bear  on  this  subject  and  to  add  such  new  data  and  draw 
such  general  conclusions  as  seem  warranted. 


II 

The  Situation  in  the  Agricultural  Market. — For  years  there 
have  been  more  or  less  insistent  demands  for  the  elimina- 
tion of  middlemen  from  the  agricultural  market — demands 
that  the  product  go  more  "direct"  from  producer  to  consumer. 
The  statement  has  been  made  and  widely  circulated  that  the 
farmer  receives  on  the  average  but  35  per  cent  (or  some  other 
small  per  cent)  of  the  retail  price  of  his  product.13  Examples 
have  been  frequently  quoted,  as  typical  of  all  kinds  of  prod- 
ucts, of  farmers  who  have  received  seventy-five  cents  for  a 
barrel  of  apples  for  which  the  consumer  paid  as  high  as  four 
dollars.  The  conclusion  commonly  drawn  from  such  state- 
ments is,  of  course,  that  either  some  one  is  getting  enormous 

11  This  is  not  entirely  true.  For  example,  the  antagonism  felt  by 
former  distributors  would  be  lacking,  and  if  there  were  no  recognized 
dealers  in  this  product,  dealer  competition  would  be  at  a  minimum. 

13  The  elimination  of  middlemen  in  the  agricultural  market  by  farmers 
as  well  as  elimination  of  middlemen  by  consumers,  was  discussed  in 
the  last  chapter.  The  elimination  of  middlemen  by  large  retail  middle- 
men was  covered  in  Chap.  XII,  and  some  of  the  factors  in  the  use  of 
middlemen  in  distributing  manufactured  goods  were  discussed  in  Chaps. 
VII,  VIII,  IX  and  X. 

13  The  following  table  of  percentages  is  taken  from  L.  D.  H.  Weld's 
investigation  of  Minnesota  prices,  "Market  Distribution"  in  Bulletin 
No.  4,  University  of  Minnesota  Studies  in  the  Social  Sciences,  pp.  7-9. 
It  shows  the  margin  "taken  out"  for  distribution  in  a  much  more 
favorable  light  than  do  many  popular  statements  and  propagandist 
remarks. 


276  PRINCIPLES  OF  MARKETING 

profits,  or  else  that  there  is  gross  inefficiency  in  agricultural 
distribution.  Investigation  shows  that,  in  general,  however, 
dealer  margins  for  staple  products  are  usually  very  much  less 
than  such  figures  seem  to  indicate,  and  that  the  marketing 
of  agricultural  products  is  surprisingly  efficient  in  view  of  the 
problems  which  are  involved.14  On  the  other  hand,  it  is 
equally  true  that  some  middlemen  do  reap  enormous  profits 


13  Note  continued.  Per  Cent  of 

Value  of  Retail 

Commodity  Price  Received 

Product  Marketed  by  Farmer 

Milk  $7,000,000  45 

Cream    1,400,000  40 

Butter  fat    11,000,000  75 

Dairy  butter  3,600,000  75 

Poultry    1,800,000  45 

Eggs    6,200,000  69 

Live   stock    34,000,000  55 

Grains  56,000,000  70 

Potatoes    3,000,000  50 

Other  vegetables  1,000,000  30 

Fruits    200,000  30 


"See  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products,  especially 
Chaps.  IV,  IX,  and  X.  Some  figures  popularly  quoted  contrast  the 
price  received  by  the  farmer  with  the  price  of  the  goods  on  reaching 
the  consumer  after  manufacture,  implying  that  the  difference  is  the 
cost  of  distribution.  Such  comparisons  are  always  erroneous  because 
they  include  the  cost  of  manufacture  in  the  marketing  cost.  Further- 
more, many  such  comparisons  have  been  made  on  a  volume  basis. 
Since  much  of  the  original  raw  material  is  not  contained  in  the  final 
product  this  comparison  is  also  erroneous. 

The  margins  of  various  dealers  in  the  farm  market  are  shown  on 
p.  510.  A  more  detailed  table,  which  covers  the  cost  of  marketing  wheat, 
follows.  This  data  appeared  first  in  Kerr  and  Weld,  'Trices  of  Wheat 
in  Kansas  City,  etc.,"  House  Document  1271,  63d  Congress,  3d  Session, 
p.  27.  It  will  be  found  in  Weld,  The  Marketing  of  Farm  Products, 
p.  212.  Note  that  of  the  26.5  cents  spread  between  the  farmer's  price 
and  the  Philadelphia  price,  21.8  cents  was  paid  out  for  railway  freight. 
Under  the  rates  now  prevailing  this  is  both  relatively  and  absolutely 
greater. 


THE  ELIMINATION  OF  MIDDLEMEN          277 

at  times,  that  dishonest  practices  are  found,  and  that  gross  in- 
efficiency is  sometimes  present.15 

Direct  Buying  by  Manufacturers.— It  was  shown  in  Chap- 
ter VI  that  manufacturers  often  buy  their  raw  materials  di- 
rectly from  the  source  of  supply.  In  fact,  it  is  probably 
more  common  for  manufacturers  to  buy  their  important  raw 
materials  immediately  from  the  producers  than  to  sell  their 
final  product  to  the  consumer,  or  even  to  the  retailer,  through 
their  own  sales  organization.  And  it  has  been  shown  that 
some  go  so  far  as  to  control  or  even  own  the  source  of  supply 
of  their  raw  material.  Large  growers  and  large  buyers  of  ag- 
ricultural products  generally  tend  to  go  over  the  head  of  one 
or  more  of  the  middlemen  of  the  usual  channel  of  distribu- 
tion.16 Manufacturers  of  mechanical  devices  buy  important 
parts  and  equipment,  which  they  do  not  make  themselves,  al- 

14  Note  continued.  Cents  per 

Bushel 

Price  received  by  farmer  in  Kansas 87.0 

Margin  taken  by  country  elevator 3.0 

Freight  rate  to  Kansas  City 6.2 

Inspection,  weighing,  and  interest  on  draft .25 

Commission    1 .0 


Price  paid  by  shipper  in  Kansas  City 97.45 

Freight  rate,  Kansas  City  to  Philadelphia 15.6 

Mixing  in  Kansas  City  elevator .25 

Exchange .20 

Overhead  expense  of  shipper .375 

Net  profit  of  shipper .625 

Price,  delivered  in  Philadelphia 114.500 

15  The  "middleman"  most  railed  against  is  probably  the  jobber.    Yet 
his  margin  of  profit  is  usually  very  low  and  his  efficiency  very  great. 
On  the  other  hand,  the  retailer's  margin  is  very  great  and  his  efficiency 
very  low.    See  Chaps.  XI  and  XXV;  also  L.  D.  H.  Weld,  The  Mar- 
keting of  Farm  Products,  Chaps.  IV  and  VI. 

16  "In  a  few  cases  eastern   mills  buy,  in  the  'fleece'  wool   sections, 
direct   from   representatives   who   collect   small   lots   for  them.    Occa- 
sionally, an  eastern  merchant  may  attempt  to  secure  his  supply  direct 
from  the  farmers,  but  this  method  is  expensive,  slow,  and  pays  only 
under  exceptional  circumstances." — P.  T.  Cherington,  The  Wool  Indus- 
try, p.  61. 


278  PRINCIPLES  OF  MARKETING 

most  exclusively  through  their  own  buyers  or  through  the 
salesmen  of  the  manufacturers.  In  fact,  in  most  cases  involv- 
ing the  sale  of  production  goods  to  manufacturers  in  which  the 
number  of  producers  is  small,  or  the  number  of  manufacturing 
concerns  is  small,  and  particularly  when  the  volume  of  busi- 
ness is  large,  there  is  a  probability  that  direct  connections 
will  be  established  and  that  consequently  the  services  of  the 
middlemen  will  not  prove  essential.17 

Many  raw  materials  and  semi-manufactured  products  are, 
nevertheless,  better  handled  through  middlemen,  and  not  al- 
ways for  reasons  of  immediate  economy.  This  is  true,  for 
example,  in  the  textile  trade.  Thus  Copeland  after  relating 
that  "the  pound  of  cotton  will  pay  tribute  to  two  Liverpool 
brokers,  to  a  yarn  agent  and  merchant,  to  a  cloth  agent,  con- 
verter, and  merchant,  and  finally  to  a  wholesaler  and  re- 
tailer," says: 

"The  advantage  accruing  from  this  multiplicity  of  middle- 
men is  not  inexpensiveness  but  flexibility.  The  tentacles  of  the 
Manchester  trade  reach  out  to  all  corners  of  the  world,  and  what- 
ever form  of  manufactured  cotton  is  sought,  whatever  accomoda- 
tion  is  desired,  some  one  can  be  found  in  Manchester  ready  to 
accept  the  commission.  Of  all  the  assets  which  make  it  possible 
for  the  cotton  industry  to  attain  its  largest  dimensions  in  a  coun- 
try whicTT  does  not  produce  the  raw  material,  and  which  con- 
sumes only  ten  or  twenty  per  cent  of  the  yarn  and  cloth  manu- 
factured in  its  mills,  none  is  more  significant  than  the  adaptability 
of  the  commercial  organization."  * 

Direct  Marketing  of  Manufactured  Products. — It  was 
shown  in  Chapter  X  that  with  their  organizations  growing 
in  size  and  financial  strength,  and  with  the  problems  of  or- 
ganization for  production  nearer  solution,  many  manufactur- 
ers have  now  time  and  financial  resources  to  devote  to  the 
sale  and  distribution  of  their  product.  As  a  consequence  of 

17  See  pp.  286-287. 

18  M.  T.  Copeland,  The  Cotton  Manufacturing  Industry  of  the  United 
States,  p.  371. 


THE  ELIMINATION  OF  MIDDLEMEN          279 

this,  and  of  the  pressure  of  increasing  competition,  numerous 
establishments  have  taken  over,  in  whole  or  in  part,  the  dis- 
tribution of  their  products  as  well  as  the  purchase  of  their 
raw  materials.  Manufacturers  have,  in  fact,  assumed  charge 
of  the  sale  of  their  products  to  such  an  extent  that  there  is 
today  a  large  and  growing  part  of  the  selling  field  which  is 
either  in  a  state  of  transition  or  which  has  already  passed 
from  the  control  of  wholesale  middlemen  to  that  of  the  manu- 
facturers. There  is,  at  present,  not  only  a  great  pressure  on 
manufacturers  to  create  a  demand  for  their  products,  but  that 
pressure  is  continuous  if  they  would  hold  the  demand  that 
already  exists  and  the  new  demand  which  they  may 
create. 

Jobbers,  likewise,  often  reach  out  and  buy  directly  from 
producers  products  which  are  commonly  handled  by  middle- 
men between  producers  and  jobbers,  so  that  the  services  of 
selling  and  purchasing  agents  are  now  frequently  dispensed 
with  by  the  larger  jobbers.  And  large  retailers  generally 
endeavor  to  buy  directly  from  producers.  This  may  be  ac- 
complished through  their  ability  to  order  in  large  enough 
quantities  to  afford  an  inducement  to  the  manufacturer  to 
sell  directly  to  them  at  wholesale  prices.19  Or  a  store  may 
establish  a  wholesale  department  in  order  to  obtain  wholesale 
prices.  Large  chain  stores  usually  buy  directly  and  have 
their  own  jobbing  organizations.  Smaller  stores  frequently 
combine  their  purchases  and  order  in  large  amounts  directly 
from  producers,  or  form  a  wholesale  organization  of  their 
own. 

The  chief  efforts  of  farmers  and  of  final  consumers  to 
eliminate  middlemen  have  taken  the  form_of  association  into 
cooperative  organizations.  In  addition  to  this,  individual  pro- 
ducers and  consumers  do  some  direct  marketing  in  their  use 
of  public  markets,  the  express  service,  and  parcel  post. 

19  Sometimes  prices  are  based  entirely  on  the  quantity  bought,  regard- 
less of  whether  the  purchaser  is  a  retailer  or  a  jobber. 


280  PRINCIPLES  OF  MARKETING 

III 

The  Arguments  for  Elimination. — Much  of  the  argument 
for  eliminating  middlemen  arises  from  the  false  notion  that 
the  fewer  the  distinct  agencies  that  handle  a  product,  the 
more  quickly,  efficiently,  and  cheaply  it  can  be  delivered  to 
the  consumer.20 !  In  production  it  is  not  disputed  that  the 
division  of  labor  leads  to  better  and  cheaper  production.  But 
many  fail  to  realize  that  the  advantages  of  specialization  and 
division  of  labor  apply  in  marketing  as  well  as  in  produc- 
tion.21 At  least  they  are  not  convinced  that  this  is  true.  Of 
course,  few  argue  that  banking,  transportation,  and  insurance 
are  not  better  performed  under  existing  specialized  methods 
than  would  be  the  case  if  those  services  were  performed  by 
producer  or  consumer.  But  that  equal  efficiency  results  from 
the  presence  of  specialized  country  shippers,  jobbers,  selling 
agents,  and  retailers  is  not  so  commonly  accepted.  Yet  this 
is  true,  and  it  is  unconsciously  recognized  by  those  who  appear 
most  anxious  to  correct  the  existing  system. 

When  farmers,  for  example,  eliminate  a  middleman  by 
means  of  a  cooperative  association  they  themselves  perform, 
through  a  specialized  organization,  the  very  functions  he 
performed.  When  an  association  is  formed  at  a  local 
market  where  no  middleman  exists,  another  middleman 
is,  in  effect,  added.  An  organization,  such  as  the  Cali- 

20  Much  of  the  attack  upon  the  middleman  smacks  of  the  ideas  of  the 
middle  ages  and  the  early  modern  era  when  it  was  quite  generally  held 
that  merchants  were  "unproductive",  and  so  parasitic,  and  given  to 
deceit  and  to  dishonest  practices  generally.  For  an  interesting  col- 
lection of  these  early  views  see  Nystrom,  Economics  oj  Retailing, 
Chap.  I. 

31  For  the  best  presentation  of  this  argument  in  the  case  of  the  agri- 
cultural middleman,  see  L.  D.  H.  Weld,  The  Marketing  oj  Farm  Prod- 
ucts, Chap.  I,  and  other  parts  of  the  book  in  which  the  problem  is  dis- 
cussed. See  also  E.  G.  Nourse,  The  Chicago  Produce  Market  (1918), 
pp.  176-178,  and  H.  Clay,  Economics  for  the  General  Reader  (American 
edition,  1918),  pp.  47-53,  74-76,  82. 


THE  ELIMINATION  OF  MIDDLEMEN          281 

fornia  Fruit  Growers'  Exchange,  performs  the  same  func- 
tions as  does  an  independent  agency.  When  a  manufacturer 
eliminates  a  jobber  he  must  perform  the  jobbing  func- 
tion himself,  and  when  consumers  eliminate  a  retailer  or  even 
go  further  and  eliminate  the  jobber  they  themselves  perform 
the  dealer's  functions.22  The  farmers'  organization  is  directly 
supervised  by  a  manager  and  committee,  who  are  supposed 
to  be,  or  to  become,  specialists  and  experts  in  marketing;  the 
manufacturer  has  his  special  selling  organization,  and  estab- 
lishes branch  selling  houses  and  storage  facilities;  and  so,  like- 
wise, consumers  duplicate  existing  machinery  when  they  buy 
"directly."  Even  individual  farmers  who  market  directly 
must  give  much  time  and  attention  to  the  performance  of 
their  market  activities,  and  take  over  the  work  of  middle- 
men. 

At  the  root  of  much  misunderstanding  is  a  general  failure  to 
realize  that  the  work  of  marketing  has  to  be  performed  and 
that  it  usually  involves  labor  as  difficult  and  as  expensive  as 
the  work  of  production.  A  commodity  is  only  half  produced, 
in  fact,  when  it  is  harvested  or  manufactured.  Consequently, 
the  statement  that  the  services  of  a  middleman  have  been 
eliminated  sometimes  proves  misleading.  For  many  persons 
assume  therefrom  that  the  functions  ^w^clTtnat  mioateman 
performed  have  likewise  been  done  away  with.  But  this  is  not 
the  case.  When,  for  example,  a  manufacturer  sells  directly 
to  the  retail  trade,  it  is  necessary  for  him  to  create  the  de- 
mand for  his  product  through  the  use  of  advertising  or  sales- 
manship, or  both;  whereas  under  the  orthodox  system  he  de- 
pends upon  the  jobber  or  the  selling  house  for  this  service. 
Again,  as  was  the  case  to  a  large  degree  after  America  entered 
the  World  War,  when  the  pressure  in  a  given  trade  is  on  the 
purchaser,  it  means  that  the  buyer  who  goes  around  the  mid- 
dleman must  himself  take  over  the  buying  and  assembling 
functions  of  the  middleman. 

22  The   consumers  even  go  further  in  England  and  "eliminate"  the 
manufacturer  in  some  cases,  and  even  the  farmer.    See  p.  265. 


282  PRINCIPLES  OF  MARKETING 

Who  Profits  from  "Elimination"? — Since  middlemen  may 
be  passed  over  by  producers,  by  consumers,  or  by  other  mid- 
dlemen, the  effect  of  this  elimination  upon  the  various  parties 
to  the  market  is  of  interest.  The  objects,  for  example,  of 
producer  and  consumer  cooperation  are  to  increase  the  farmers' 
price,  or  to  lower  prices  to  the  consumer,  through  reducing  in 
each  case  the  spread  between  producers'  and  consumers' 
prices.23  The  two  objects  may  %vell  be  antagonistic.  Farm- 
ers' organizations  which  eliminate  middlemen  are  likely  to 
assume  that  existing  market  prices  will  continue  to  prevail. 
They  do  not  anticipate  that  the  consumer  price  will  be  lowered, 
but  rather  that  their  share  of  that  price  will  be  greater.  A 
little  different  aspect  of  this  attitude  is  shown  in  the  attempts 
of  some  farmers'  organizations  to  hold  back  or  even  to  de- 
stroy surplus  crops  in  years  of  heavy  yields,  to  reduce  acre- 
age when  there  are  prospects  of  a  falling  price,  and  in  their 
opposition  to  the  free  importation  of  competing  agricultural 
products.  Ultimate  consumers,  on  the  other  hand,  believe 
they  are  benefited  by  large  home  crops,  and  by  large  impor- 
tations of  foreign  crops  which  depress  the  price  of  the  com- 
modities they  consume.  And  when  a  middleman  "goes 
around"  another  middleman,  his  chief  interest  is  to  gain  for 
himself  any  expense  or  profit  which  is  saved,  or  any  market 
control  which  may  result.  These  facts  indicate  that  any  good 
results~£rom__the  elimination  of  middlemen,  do  not  necessarily 
accrue  to  both  producer  and  final  consumer.  Either  may  ab- 
sorb, at  least  temporarily,  any  "profits"  or  "saving"  that  re- 
sult without  passing  them  on  to  or  dividing  them  with  the 
other.  It  is  possible  likewise  that  the  gain  may  be  absorbed 
by  a  middleman. 

This,  of  course,  should  not  be  construed  as  an  argument 

23  The  "spread"  is  the  difference  between  the  price  received  by  the 
seller  and  the  price  which  he  pays.  It  thus  refers  to  the  difference  that 
results  from  the  product  going  through  the  hands  of  one  middleman, 
such  as  the  retailer.  It  may  also  refer  to  the  total  difference  between 
the  price  paid  to  the  producer  and  the  price  paid  by  the  consumer. 


THE  ELIMINATION  OF  MIDDLEMEN          283 

against  the  improvement  of  methods  where  that  is  possible, 
and  it  is  not  an  argument  against  reducing  any  undue  profits 
reaped  by  middlemen.  Such  ends  are  just  as  desirable  as  it 
is  to  avoid  waste  in  consumption,  to  prevent  inefficiency  and 
incompetence  in  production,  to  curtail  combinations  of  buy- 
ers which  force  down  prices,  or  to  reduce  inordinate  profits 
reaped  by  producers.  In  the  end,  competition  will  usually 
cause  the  savings  which  may  result  from  superior  methods 
to  benefit  the  producer  and  consumer. 

The  Importance  of  Service. — In  the  discussion  of  the  use 
of  middlemen  as  it  relates  to  the  costs  of  distribution,  there 
is  a  rather  common  failure  to  consider  the  service  performed. 
Much  of  the  excessive  cost  of  distribution  can  be  attributed 
to  the  prevalence  in  the  retail  trade  of  small  neighborhood 
stores,  free  deliveries,  returns,  allowances,  and  the  granting 
of  credit.  Conditions  of  this  kind  have  their  effect  through- 
out the  whole  distributive  organization.  The  great  variety 
of  products  found  in  some  lines  of  trade  caters  to  the  con- 
sumer's demand  for  something  new  and  different.  This  de- 
sire of  the  consumer  for  new  and  varied  products  practically 
forces  the  whole  trade  to  provide  them.  The  failure  of  one 
dealer  to  do  so  is  quickly  capitalized  by  his  competitors.  Pro- 
vision must  be  made  by  manufacturers  and  wholesalers  for 
delivering  small  quantities  of  goods  at  frequent  intervals,  in 
order  to  avoid  loss  through  style  changes,  change  of  prices,  or 
deterioration  of  perishable  commodities.  This  causes  exces- 
sive sales  and  buying  effort  and  costly  transportation  and  de- 
livery. 

The  Problem  Is  One  of  the  Control  of  Specialization. — 
It  appears  that  the  crux  of  the  middleman  problem  is  not 
whether  the  middleman  shall  be  eliminated  as  a  middleman, 
but  rather  whether  marketing  can  best  be  performed  by  inde- 
pendent specialized  marketing  agencies  or  by  integrated  or- 
ganizations. That  is,  should  production  be  integrated  with 
marketing,  one  marketing  agency  integrated  with  another,  and 
consumption  integrated  with  marketing?  That  manufactur- 


284  PRINCIPLES  OF  MARKETING 

ers'  marketing  tends  toward  integration  seems  beyond  dispute, 
although,  as  has  been  shown,  there  are  many  conditions  which 
may  definitely  retard  the  movement.  The  trend  has  not  been 
so  evident  in  agricultural  marketing  because  the  smaller  size 
of  the  units  which  buy  and  sell  makes  it  more  difficult,  and 
because  the  problem  of  demand  creation,  which  is  often  a  com- 
pelling motive  leading  to  the  manufacturer's  desire  to  con- 
trol his  market,  is  not  so  important  with  agricultural  prod- 
ucts. But  with  the  recent  development  of  cooperative  market- 
ing of  farm  products  and  particularly  the  development  of 
cooperative  federation,  the  trend  is  evidenced  in  agriculture. 

When  integration  does  take  place,  specialization  is  not  done 
away  with.  Separate  specialized  efforts  are  then  coordinated 
by  the  control  of  a  single  management,  rather  than  by  .market 
forces .  acting  upon  independent  factors.  And  there  may  well 
be  some  question  whether  such  integration  of  marketing  steps, 
by  any  means  leads  to  lower  prices  even  though  it  may  tend 
to  greater  market  control  by  the  integrating  party.2* 

Specialization  and  Integration. — Marketing  seems  to  be  de- 
veloping much  as  production  has  developed.  That  is,  special- 
ization and  division  of  labor  take  two  forms:  (1)  they  may 
lead  to  a  high  degree  of  division  of  processes  among  inde- 
pendent producers  and  middlemen,  as  in  the  textile  trade;  or 
(2)  they  may  be  brought  about  under  the  integration  of  spe- 
cialized units,  as  in  the  steel  industry.  The  technical  basis 
for  each  is  the  same,  but  the  control  is  divided  in  the  one  case, 
and  unified  in  the  other.  And  whereas  the  large  producer 
or  consumer  can  perhaps  profitably  operate  his  own  sales  or 
buying  organization,  his  smaller  neighbor  may  find  this  out  of 
the  question.  The  advantages  of  specialization  inhere  in 
either  case.  The  difference  is  in  the  method  of  control. 
Independent  agencies  endeavor  to  control  their  activities  in 
such  a  manner  as  to  profit  from  their  merchandising  opera- 
tions. When  these  activities  are  integrated  with  production, 
consumption,  or,  in  the  case  of  middlemen,  with  the  operations 

*  See  pp.  177-181. 


THE  ELIMINATION  OF  MIDDLEMEN          285 

of  other  middlemen,  the  integrating  party  endeavors  to  control 
the  operations  so  as  to  forward  its  own  primary  activities. 

Fundamental  Basis  for  Control. — Such  unified  control  is 
based  fundamentally  on  the  possibility  of  securing  better  ser- 
vice, or  on  the  hope  that  the  integrated  service  may  be  secured 
at  a  IpweE— cost.  This  lower  cost  may  result  from  a  more 
economical  performance  of  the  service  or  from  securing  the 
profits  made  by  the  independent  organizations. 

Other  things  being  equal,  each  producer  is  likely  to  prefer 
to  market  his  own  product  when  his  profits  depend  upon  suc- 
cessful selling.  But,  of  course,  other  things  are  by  no  means 
equal,  and  in  many  instances  the  producer  is  lacking  in  ability, 
in  knowledge  of  the  market,  or  in  capital.  But  when  compe- 
tition is  very  keen,  or  when  the  product  is  a  specialty  for  which 
a  demand  must  be  created — conditions  which  exist  throughout 
much  of  the  field  of  manufacture  and  of  merchandising  and 
with  a  few  agricultural  products — this  desire  may  become  a 
necessity.  It  may  be  necessary  to  control  a  part  of  the  market 
for  the  product,  or  it  may  be  necessary  to  control  the  source  of 
a  raw  material.  Likewise,  where  middlemen  have  proved  dis- 
honest, or  where  none  are  available,  as  often  occurs  in  the 
marketing  of  farm  products,  the  necessity  for  direct  action  by 
the  producer  becomes  evident. 

Industrial  Conditions  Affect  Market  Integration. — Indus- 
trial conditions  may  also  prove  to  be  important  elements  in 
the  decision.  The  development  of  transportation  and  commu- 
nication, for  example,  has  brought  producers  and  consumers 
nearer  together  and  has  thereby  reduced  the  need  for  market 
intermediaries.  The  introduction  of  "standard  equipment"  on 
automobiles — lights,  windshields,  tires,  and  other  equipment — 
largely  reduced  the  need  to  retail  them  and  thereby  to  job 
them.  The  growth  of  chain  stores  has  forced  many  competing 
retail  firms  to  adopt  cash-and-carry  methods,  and  to  form  cen- 
tral buying  organizations.  IncreasecFproduction  of  oranges  de- 
veloped a  problem  of  demand  creation  for  California  and 
Florida  growers.  Perishable  products  are  quite  commonly 


286  PRINCIPLES  OF  MARKETING 

marketed  "directly"  because  independent  middlemen  do  not 
give  satisfactory  service.  It  is  also  true  that  many  prod- 
ucts carry  with  their  sale  the  necessity  of  giving  "service," 
i.  e.,  repairs,  renewals,  equipment,  supplies,  instruction  in  the 
use  of  the  product.  Among  these  are  farm  machinery,  trac- 
tors, automobiles,  and  adding  machines.  Service  of  this  kind 
is  usually  most  satisfactorily  ^performed  by  the  producer. 
This  leads  to  the  substitution  of  branch  houses  controlled  by 
the  manufacturer  for  the  ordinary  jobber,  with  a  resulting 
close  contact  and  close  control  over  retail  outlets.  Finally, 
producers  or  buyers  may  become  financially  strong,  and  since 
this  is  essential  to  direct  purchase  and  sale  it  may  cause  a  com- 
plete reversal  of  the  former  policy. 

Conditions  Which  Make  Integration  Feasible. — Condi- 
tions like  those  which  have  been  outlined  may  make  direct 
marketing  desirable.  But  the  desire  cannot  be  fulfilled  un- 
less the  particular  project  is  feasible.  To  be  feasible,  the 
integrated  service  must  be  performed  in  a  satisfactory  man- 
ner at  a  cost  which  does  not  add  too  much  to  the  selling 
price.  For  if  the  price  is  too  high  the  consumer  will  not  buy, 
because  he  cannot  be  made  to  desire  the  merchandise  enough 
to  do  so,  particularly  if  competing  products  are  sold  at  a 
lower  price.  The  feasibility  of  direct  marketing  is,  there- 
fore, basically  a  matter  of  cost.  The  cost  must  not  be  so  far 
increased  as  to  offset  the  advantages  gained.  If,  on  the 
other  hand,  costs  are  lowered,  a  definite  advantage  results. 

One  of  the  most  important  conditions  determining  the  cost 
of  direct  marketing  is  the  sjgg__ofjjie  transactions  between 
buyer  and  seller.  If  the  volume  of  individual  transactions 
is  large,  direct  dealing  may  prove  practical.  This  point  was 
touched  upon  in  discussing  the  jobber's  services.25  If  the 
buyer  takes  large  quantities  of  a  product,  the  manufacturer 
can  often  afford  the  expense  of  direct  sale,  and  the  buyer 
likewise  can  afford  the  trouble  and  expense  of  direct  pur- 
chase. The  money  value  of  the  business  must  be  great  enough 

25  See  Chap.  VIII. 


THE  ELIMINATION  OF  MIDDLEMEN          287 

to  absorb  the  expense  of  direct  sale.  If  the  physical  volume 
•will  permit,  direct  shipment  is  also  practicable. 

Manufacturers  buying  raw  materials  commonly  purchase  in 
sufficient  volume  to  warrant  both  direct  shipment  and  direct 
sale.  Retailers  who  handle  a  narrow  line  of  goods,  such  as 
shoes,  clothing,  automobiles,  and  farm  implements,  can  usu- 
ally buy  directly  with  economy.  When  the  sale  of  indi- 
vidual items  is  small,  volume  is  sometimes  achieved  by  sell- 
ing a  number  of  related  articles.  This  is  done  by  such  firms 
as  the  National  Biscuit  Company,  Heinz,  the  meat  packers, 
and  the  International  Harvester  Company.  Again,  even 
though  individual  sales  may  be  small,  if  enough  buyers  are 
concentrated  in  a  given  district  the  same  results  may  be 
achieved.  Thus,  many  manufacturers  of  grocery  and  drug 
products  can  market  to  retailers  because  of  the  density  of 
sales,  and  manufacturers  can  sometimes  market  directly  in 
a  large  city,  although  they  find  the  cost  prohibitive  in  sparsely 
settled  areas.  But  if  producers  are  small  and,  consequently, 
cannot  sell  in  large  quantities,  or  over  wide  territories,  some 
medium  for  collecting  products  into  central  reservoirs  is  neces- 
sary. This  is  true  whether  the  goods  be  purchased  in  the  end 
in  small  quantities  or  in  large.26  Again,  if  purchasers  cannot 
buy  in  large  quantities,  some  agency  for  dispersion  is  neces- 
sary. If  producers  and  consumers  are  both  small,  both 
concentration  and  dispersion  are  ordinarily  necessary,  and  in- 
dependent middlemen  usually  arise  to  perform  these  functions. 

Scale  of  Production  and  Direct  Marketing. — The  points 
discussed  in  the  last  paragraph  seem  to  show  that  the  pre- 
vailing tendency  in  production  in  an  industry  indicates  in 
some  degree  the  prevailing  type  of  distribution  in  that  in- 
dustry. In  agriculture,  for  example,  and  in  certain  fields  of 
manufacture,  small  producing  units  and  small  independent 
middlemen  prevail.  With  farm  machinery,  mineral  oil,  and 
steel,  large  scale  production  is  the  rule,  and  here,  therefore, 
a  high  degree  of  direct  marketing  is  found.  Quantity  pro- 

26  See  pp.  29-30,  39-42,  61-65,  90-91,  97,  153-155. 


288  PRINCIPLES  OF  MARKETING 

duction  is  not,  however,  a  sure  criterion  of  direct  marketing. 
Sugar  is  marketed  through  middlemen,  although  the  raw  ma- 
terials are  usually  bought  direct;  copper  is  likewise  marketed 
through  middlemen.  In  both  instances,  large  scale  manufac- 
ture is  the  rule.  But  in  each  case,  quality  is  determinable 
through  scientific  analysis;  the  market  price  for  given  grades 
is  uniform;  and  higgling  of  any  kind  is  almost  eliminated.27 
No  "touting"  of  goods  can  avail  under  such  conditions,  and 
"selling  points"  are  determined  in  the  laboratory  by  the 
buyer  himself.  Selling  such  goods  consists  merely  in  bring- 
ing buyer  and  seller  together. 

Many  farmers  sell  direct  to  consumers  or  retailers,  and 
sometimes,  as  in  the  case  of  the  California  Fruit  Growers' 
Exchange,  the  whole  process  of  distribution  is  in  a  large 
measure  controlled  by  the  growers.  But  direct  sale  is  an 
exception  to  the  general  rule,  arising  out  of  purely  local  con- 
ditions, such  as  proximity  to  a  public  market,  or  to  the  store 
of  the  retailer.  In  the  case  of  the  fruit  growers  special  condi- 
tions previously  discussed  are  at  work,28  and,  furthermore, 
the  small  producing  units  are  combined  into  a  large  marketing 
federation.  It  is  this  organization,  not  the  individual  growers, 
which  does  the  marketing. 

Importance  of  Individual  Characteristics. — Just  as  large 
scale  production  seems  likely  to  hold  the  field  in  some  in- 
dustries and  small  scale  production  in  others,  and  just  as 
neither  type  has  yet  proved  superior  in  other  fields,  so  in  dis- 
tribution various  types  and  scales  of  size  and  various  degrees 
of  integration  are  found.  Even  in  the  distribution  of  the 
same  product  under  substantially  similar  conditions  great 
variations  prevail.  No  general  conclusions  of  themselves 
are  sufficient  to  account  for  this.  The  reason  in  many  cases 
seems  to  be  founded  upon  the  characteristics  of  the  individual 
business  enterprise. 

37  It  also  appears  that  the  sales  agencies  are  in  reality  often  closely 
controlled  by  the  producer. 
28  See  pp.  252-253, 


THE  ELIMINATION  OF  MIDDLEMEN          289 

A  firm  with  large  financial  resources  may  be  able  to  under- 
take a  direct  campaign,  while  its  financially  weaker  competi- 
tor is  unable  to  raise  the  necessary  funds,  or  at  best  is  unable 
to  withstand  the  financial  losses  in  case  of  failure.  Further- 
more, the  individual  capacity  and  experience  of  those  in 
entrepreneurial  and  managerial  positions  vary  greatly.  In 
one  enterprise,  those  in  responsible  positions  may  be  primarily 
trained  in  production  and  know  little  or  nothing  of  distri- 
bution. They  may  realize  their  limitations,  or,  not  doing  so, 
fail  in  the  effort  to  extend  the  scope  of  their  distributive  ma- 
chinery. In  a  competing  concern,  the  opposite  may  be  the 
situation.  Finally,  it  seems  often  to  be  the  case  that  many 
a  manager's  capacity  to  oversee  a  business  is  soon  reached. 
For  him,  a  large  distributive  plan  would  be  fatal.  With  such 
large  variations  in  the  capacity  and  training  of  business  men 
it  is  evident  that  under  the  same  conditions  there  may  result 
very  different  solutions  of  a  market  problem. 

"Profiteering." — In  times  of  a  rising  market,  middlemen 
who  buy  at  the  lower  prices  can  resell  at  higher  prices,  so 
that  the  cry  of  profiteering  is  particularly  strong  during 
a  period  of  rising  prices.  Of  course,  when  prices  fall,  mid- 
dlemen are  likely  to  lose.29  Merchants,  manufacturers,  farm- 
ers, and  landlords  are  alike  in  reaping  large  profits  on  a  ris- 
ing market:  if  they  hold  goods  for  any  time,  the  profits 
result  from  high  prices;  they,  individually,  and  even  as 
classes,  do  not  cause  them.  The  manufacturer  or  merchant, 
for  example,  who  avoids  "profiteering"  by  selling  at  cost  in 
addition  to  a  reasonable  profit  leaves  the  way  open  for  the 
next  owner  to  "profiteer."  Seldom  does  the  final  consumer 
benefit. 

29  Greater  losses  are  probably  borne  by  producers  than  by  merchants. 
Because  the  goods  are  commonly  longer  in  the  process  of  production 
than  of  merchandising  the  time  element  is  of  greater  importance. 
Furthermore,  the  finished  goods  of  the  merchant  can  usually  be  liqui- 
dated more  rapidly  than  can  the  producers'  high  priced  inventories  of 
raw  materials  and  supplies.  Likewise,  unless  the  merchant  speculates, 
the  producer  is  likely  to  benefit  more  from  rising  prices. 


290  PRINCIPLES  OF  MARKETING 

Final  Conclusions. —  (1)  The  general  advantages  of  the 
middleman  system  are  the  advantages  of  specialization  and 
of  division  of  labor  by  independent  units.  Such  specializa- 
tion tends  toward  more  skillful  and  more  economical  opera- 
tion. But  it  has  been  shown  that  these  advantages  are  not 
necessarily  lost  when  marketing  steps  are  absorbed  by  pro- 
ducers, consumers,  or  other  middlemen.  The  only  change 
may  be  the  substitution  of  a  hired  specialist  for  the  inde- 
pendent specialist.  Efforts  to  do  away  with  middlemen 
may,  furthermore,  simply  add  to  existing  market  machinery. 
When  a  department  store,  a  chain  store,  or  a  mail  order 
house  begins  to  buy  directly  of  manufacturers  the  elimina- 
tion of  a  jobber  does  not  usually  result.  None  of  the  existing 
jobbers  are  thereby  forced  to  retire.  It  follows  rather  that 
a  new  jobbing  organization — within  the  organization  of  the 
integrating  dealer — has  been  added  to  those  already  existing. 
The  cost  of  wholesaling  in  general  may  be  thereby  increased. 
For  the  scale  on  which  jobbing  is  carried  on  would  be  made 
smaller  with  the  introduction  of  more  wholesale  organizations, 
old  style  jobbers  might  be  left  with  less  profitable  lines,  and 
hired  managers,  possibly  less  efficient  than  the  independent 
entrepreneur,  would  be  used  in  the  new  organization.30 

(2)  It  is  a  false  idea  that  the  fewer  the  hands  a  product 
passes  through  in  going  to  market,  the  lower  will  be  the  cost 
of  distribution,  and  hence,  the  lower,  final  prices  may  be.  This 
is  particularly  untrue  when  integration  results  in  sales  and 
deliveries  which  are  smaller  in  value  or  in  physical  volume 
than  were  those  made  by  the  independent  middleman.  It 
was  shown,  for  example,  in  Chapter  VIII  that  the  grocery 
jobber  can  sell  and  deliver  more  cheaply  to  grocers  than  can 
the  manufacturer  of  a  grocery  product  which  is  sold  in  small 
amounts.  Since  a  manufacturer  usually  sells  fewer  products 
than  the  competing  middleman  whom  he  is  "going  around",  a 
larger  relative  fixed  investment  is  likely  to  be  required, 

30  But  see  pp.  150,  152,  Tables  V  and  VI. 


THE  ELIMINATION  OF  MIDDLEMEN          291 

and  he  is  likely  to  have  larger  current  expenses  for  selling, 
storage,  and  delivery.  His  market  risks  will  also  be  greater, 
for  they  extend  over  a  longer  time  than  formerly,  and  they 
must  be  borne  by  a  single  product  or  a  small  line,  whereas  the 
jobber's  risk  is  divided  over  a  wider  range  of  products.  This 
is  true  unless  it  is  offset  by  superior  knowledge  of  the  market, 
so  as  to  forecast  important  changes  in  demand,  or  unless  the 
direct  marketing  creates  a  large  consumer  demand  for  the 
product. 

(3)  On  the   other   hand,   when   integrated   organizations 
handle  products  sold  in  large  volume  it  may  well  be  that 
direct  economies  result.     In  the  first  place,  the  cost  of  holding 
stocks  is  possibly  lowered.      Because  of  a  close  contact  with, 
and  analysis  of,  the  specialized  market  in  which  he  sells,  a 
manufacturer  or  large  merchant  may  be  able  to  judge  the 
demand  with  great  accuracy.     He  may  carry  smalfer  stocks 
than  would  be  necessary  for  independent  dealers,  because  of 
his  greater  knowledge  of  the  market  and  of  the  greater  mobil- 
ity  of  his   stocks.31      Perishable   products   are,    furthermore, 
likely  to  be  more  economically  stored  in  specialized  warehouses 
operated  by  the  interested  producer. 

(4)  Again,  fewer  changes    of   title   take   place   when   in- 
tegrated marketing  prevails.    The  cost  of  buying  and  selling 
and  of  financing  and  bookkeeping  which  accompanies  each 
successive  change  of  title  is  very  large.    The  expense  becomes 
greater  if  the  goods  themselves  are  moved.    When  the  number 
of  independent  steps  is  cut  down,  these  costs  are  probably  less. 

(5)  Low    transportation    rates    for    large    shipments    on 
the    one    hand,     and    the    demand    of    buyers     for    small 
amounts  delivered  on  short  notice,  on  the  other  hand,  neces- 
sitate a  wholesale  and  a  retail  service  for  the  physical  dis- 
tribution of  many  products.     In  so  far  as  these  factors  are  im- 
portant this  service  can  generally  be  performed  with  greater 

31  This  last  point  was  mentioned  also  in  discussing  large  retail  organ- 
izations in  Chap.  XII. 


292  PRINCIPLES  OF  MARKETING 

economy  by  independent  retailers  and  jobbers  who  stock  the 
products  of  several  producers  than  by  the  producers  them- 
selves. 

(6)  Finally,  when  goods  are  sold  on  the  basis  of  standards* 
easily  determined  by  the  buyer,  the  opportunity  for  control 
of  the  market  by  means  of  demand  creation  on  the  part  of 
individual  producers  is  practically  nullified.  In  such  cases, 
one  of  the  strongest  motives  impelling  producers  to  market 
directly  is  eliminated,  namely,  the  desire  to  create  consumer 
acceptance,  or  demand,  for  their  particular  product  by  means 
of  their  own  sales  efforts. 

Summary. — So  long  as  there  are  small  producers  who  cannot 
distribute  their  own  products  economically;  and  so  long  as 
there  are  large  producers  inadequately  supplied  with  capital 
to  carry  on  extensive  distributive  activities,  or  handling  too 
limited  a  "line"  to  make  direct  marketing  feasible ;  and  so  long 
""  as  there  are  small  retailers  who  find  it  difficult  to  get  in  direct 
contact  with  their  numerous  sources  of  supply,  or  with  whom 
it  does  not  pay  the  producer  to  get  into  direct  contact;  or  so 
long  as  ultimate  consumers  find  more  valuable  use  for  their 
time  than  to  talk  with,  correspond  with,  or  read  the  advertise- 
ments of,  the  hundreds  of  producers  whose  goods  they  con- 
sume— just  so  long  the  middleman  is  likely  to  continue  to 
function  as  an  independent  unit  and  to  perform  services 
useful  to  society  as  well  as  to^the  factors  in  the  distributive 
process.32 

32  Seeming  exceptions  to  this  conclusion  are  the  growth  of  cooperative 
purchasing  associations  of  retailers  and  consumers  and  cooperative  sell- 
ing associations  of  small  producers.  But  these  are  really  merely  dif- 
ferent aspects  of  the  large  scale  methods  already  mentioned.  They 
are  combinations  of  small  market  units.  If  such  systems  should  largely 
prevail,  if  producers  on  the  one  hand  and  consumers  on  the  other  should 
organize  into  great  associations,  the  elimination  of  middlemen  would 
indeed  grow  apace.  In  so  far  as  such  organizations  curb  undue  competi- 
tion among  producers  and  among  middlemen,  and  in  so  far  as  they 
eliminate  undue  demands  for  service  on  the  part  of  the  consumer,  a 
real  saving  in  costs  seems  to  result. 


CHAPTER  XV 
PHYSICAL  DISTRIBUTION 

I.    TRANSPORTATION 

Introduction:   Importance  of  Transportation. — Many   of 

the  evils  and  much  of  the  strength  of  our  market  system  have 
their  origin  in  transportation  methods.  Slow  deliveries 
and  inadequate  equipment  cause  products  to  deteriorate  be- 
fore reaching  their  market,  and  slow  deliveries  necessitate  the 
maintenance  of  excessive  inventories  of  stock  and  materials 
by  stores  and  factories.1  Rapid,  efficient,  cheap  transportation 
is  essential  to  effective  distribution. 

One  of  the  most  important  aspects  of  transportation  is  the 
effect  oftnansporjtfttien  rates  upon  the  expense  of.  marketing. 
As  an  integpatpart  of  the  necessaiy^osTofinarketing,  these 
rates  affect  the  prices  at  which  products  are  sold.  And,  as 
an  essential  part  of  the  cost  of  marketing  they  largely  de- 
termine in  what  markets  the  products  of  a  particular  section 
can  be  sold.  Transportation  is  likewise  of  importance  in  de- 
termining the  ^ocatiOT_of__trade  centers.  The  geographical 
situation  of  a  cuy  with  natural  transportation  facilities  at  a 
strategic  point  between  areas  of  procTuction  and  consumption 

*"Mr.  Ford,  owning  his  own  railroad  and  insuring  prompt  freight 
movement,  cut  down  his  investment  in  materials  on  hand  by  no  less 
than  $28,000,000!"— Judson  C.  Williver,  "Henry  Ford,  Dreamer  and 
Worker,"  Review  of  Reviews,  Nov.,  1921,  p.  488. 

During  the  World  War  many  retailers,  because  of  the  uncertain  and 
slow  deliveries,  kept  twice  the  stock  on  hand  in  some  lines  that  they 
had  before  the  war.  This  was  true  even  when  the  general  shortage  of 
supplies  was  not  felt. 

293 


294  PRINCIPLES  OF  MARKETING 

practically  assures  that  city  a  place  of  importance  as  a  com- 
mercial center.    Thus, 

"Denver's  geographical  location  at  the  foot  of  the  Rocky  Moun- 
tains, near  three  of  the  natural  passways  to  the  Far  West  fol- 
lowed by  the  Union  Pacific,  the  Denver  and  Rio  Grande,  and  the 
Santa  Fe  railroads,  has  made  it  a  distributing-point  for  a  large 
hinterland." a 

Again, 

"It  is  not  a  chance  fact  that  St.  Louis  has  developed  the  largest 
mercantile  hardware  house  in  the  world.  The  city  stands  near 
the  southwestern  apex  of  the  industrial  peninsula,  and  the  farming, 
mining,  and  grazing  interests  of  the  wide  surrounding  territory 
demand  hardware  more  than  any  one  class  of  commodities.  .  .  . 
This  same  distributing  function  characterizes  also  in  a  less  degree 
the  ten  cities  with  a  population  of  over  twenty-five  thousand  along 
the  Mississippi,  the  seven  on  the  Missouri,  and  seven  on  the  Ohio."  3 

With  the  development  of  railroads,  cities  with  these  natural 
commercial  locations  are  usually  chosen  as  railroad  termini. 
They  then  become  railroad  centers  and  their  commercial  promi- 
nence is  thereby  enhanced.  For  the  comgejbitipt 'jbatween  rail- 
ways, and  often  between  railways  andwaterw^ys,  gives  to 
such  cities  an  added  advantage.  This  is  because  competitive 
necessity  once  made  lower  rates  to  and  from  them  than  it 
made  for  less  favored  communities.  In  consequence,  a  posi- 
tion naturally  strategic  has  been  strengthened  with  the  de- 
velopment of  railroads.  For  with  the  added  advantage  of  the 
lower  railway  rates  there  is  greater  reason  than  ever  to  use 
these  places  as  market  centers  from  which  to  supply  outlying 
territory.  Milling  and  storing  in  transit  privileges,  together 
with  special  carload  rates,  commodity  rates,  basing  point  rates, 
and  other  privileges  of  railway  rate  structure,  together  with  the 
competitive  advantage  of  generally  low  rates,  assure  to  such 
cities  a  continuance  of  their  position  as  important  commercial 
centers. 

2  Helen  Churchill  Semple,  American  History  and  Its  Geographic  Con- 
ditions (1903),  p.  361. 

3  Ibid.,  p.  344. 


PHYSICAL  DISTRIBUTION  295 

The  widening  of  the  markets  available  to  producers  and  dis- 
tributors is  always  of  interest  to  transportation  agencies,  for 
the  carrier's  volume  of  business  is  thereby  increased.  Rail- 
roads in  a  given  territory,  for  example ^  usually— rpake  rates  in 
such  a  way  as  to  enableTKeiFpfoducers  and  distributors  to  sell 
in  as  many  markets  as  possible.  The  problem  of  procuring 
markets  for  a  particular  business  may  become  to  a  degree, 
therefore,  the  problem  of  the  railroads  on  whose  lines  it  is 
located. 

Transportatiojijacilities  provide  for  more  than  the  creation 
of  place  utilities.  T^hey  provide  an  important  service^  in  stor- 
ing.  For  a  transportation  service  must  in  reality  serve  the 
double  purpose  of  moving  and  storing  goods.4  The  fact  that 
the  goods  are  in  the  possession  of  transportation  facilities  for 
some  time  has  an  important  bearing  upon  finance  and  risk. 
Funds  must  be  invested  in  goods  while  they  are  en  route  and 
the  volume  of  stocks  held  in  storage  is  in  part  dependent  upon 
the  speed  _andJJifi_dgpendability  of  the  transportation  service. 
The  bill  of  lading  has  been  made  an  important  type  of  col- 
lateral security,5  and  has  thereby  become  an  important  adjunct 
to  financing  goods  in  transit.6  The  extent  to  which  the  carrier 
acts  as  bailee  for  the  property  entrusted  to  it,  and  the  result- 
ing degree  to  which  it  becomes  responsible  for  the  safe  and 
prompt  delivery  of  the  goods  entrusted  to  it,  raises  important 
questions  which  concern  the  distribution  of  risk.7 

Factors  Determining  Efficiency. — The  efficiency  of  trans- 
portation is  measured  by  two  factors,  the  service  performed 
and  the  cost  of  performing  the  service.  The  adequacy  of  the 

4  The  less  of  such  storage  there  is  at  either  end  of  a  journey  the  more 
fully  the  transportation  system  can  be  utilized.    And  it  is  with  this  in 
view  that  demurrage  charges  and  track  storage  charges  have  been  intro- 
duced.   See  pp.  310-312. 

5  See   the   Bill   of   Lading   Act    (Pomerene   Act),   of   1916;    also  the 
Annual  Report  of  the  Interstate  Commerce  Commission  (1919),  p.  32, 
and  U.  S.  v.  Ferger,  250  U.  S.,  199. 

6  See  pp.  340-341,  345-346. 
'See  Chap.  XVII. 


296  PRINCIPLES  OF  MARKETING 

service  rests  upon  such  basic  considerations  as  (1)  the  supply 
of  facilities  to  carry  the  products  offered,8  (2)  the  speed  and 
care  with  which  goods  are  carried  from  point  to  point,  and 
(3)  the  speed  and  care  with  which  products  are  handled  at 
terminals.  These  three  fundamentals  are,  of  course,  inter- 
related. Thus,  in  the  case  of  railroads,  if  the  speed  of  trains 
is  increased,  a  given  number  of  cars,  and  hence  the  total  car 
supply  can  carry  a  greater  tonnage  in  a  given  time.  Again, 
a  large  part  of  the  life  of  the  average  freight  car  and  freight 
vessel  is  spent  at  the  terminals  where  they  are  loaded  and  un- 
loaded, and  it  has  been  estimated  that  two-thirds  of  railroad 
expense  is  paid  for  terminal  service.9  Congestion  in  a  single 
yard  may  tie  up  a  whole  railway  system;  and  congestion  at 
a  single  terminal  city  or  port  may  tie  up  the  transportation 
system  of  a  large  area.10  Consequently,  if  facilities  for  load- 
ing and  unloading  at  terminals  are  improved,  the  time  that 
cars  are  en  route  instead  of  serving  as  warehouses  at  terminals, 
is  increased.  To  increase  the  speed  of  movement  or  to  reduce 
the  time  spent  in  terminals  shortens  the  time  of  transportation 
and  increases  the  available  car  supply.  The  power  of  loco- 
motives, the  size  of  cars,  and  the  number  of  each  are,  of  course, 
fundamental. 

The  Relation  of  Transportation  to  Market  Areas. — The 
extent  of  the  market  for  any  commodity  and  the  territory 
which  sends  its  produce  to  and  which  is  supplied  from  any 
distribution  point  are  limited  by  the  adequacy  of  the  trans- 
portation facilities  and  the  cost  of  their  utilization.  Without 
adequate  transportation  large  scale  production  and  localized 
industry  are  commercially  impossible.  These  developments 
have  come  only  with  the  widening  of  the  market  area  within 

8  This  becomes  particularly  important  in  such  times  as  the  rush  season 
for  carrying  grain  during  the  fall  of  the  year. 

8E.  J.  Clapp,  "Railroads  and  Terminal  Waste,"  The  New  Republic, 
Feb.  1,  1922,  p.  268. 

"The  congested  condition  at  the  New  York  terminals  during  the 
winter  of  1917-18  was  given  as  one  main  reason  for  the  "heatless  Mon- 
day" order  of  the  Fuel  Administration. 


PHYSICAL  DISTRIBUTION  297 

which  products  can  be  profitably  distributed.  During  the 
past  century,  facilities  for  transport  have  been  so  improved 
and  the  costs  of  transportation  have  been  so  reduced  that 
there  is  a  "world  market"  for  hundreds  of  products.  This  de- 
velopment has  continued  during  the  past  few  years.  The  speed 
of  transport  has  j^eenincreased  on  the  public  highway  through 
the  improvement  of  the  roadway  and  the  utilization  of  the 
motor  truck,  loading  and  unloading  devices  have  also  been 
improved.  The  speed  of  railway  trains  has  been  increased, 
the  capacity  of  individual  cars  has  become  greater,  and  the 
pulling  power  of  engines  has  been  increased.  A  similar  devel- 
opment has  occurred  in  waterway  transportation.  But  here 
the  facilities  at  terminals  vary  greatly  as  between  different 
ports.  In  some  cases  human  labor  is  utilized  almost  entirely; 
in  others  it  is  almost  entirely  dispensed  with.  Warehouse 
facilities,  likewise,  vary.  The  extent  of  this  variation  depends 
in  part  on  the  nature  of  the  product  which  is  being  handled, 
and  in  part  on  the  cost  of  labor  and  the  importance  of  the 
port. 

Carload  Rates. — Since  it  costs  less  to  handle,  load,  and  un- 
load car  loads  than  it  costs  for  similar  services  for  equal 
amounts  shipped  in  less  than  carload  lots,  the  rates  charged 
for  shipment  in  carload  lots  are  commonly  lower  than  the 
rates  for  similar  products  shipped  in  smaller  quantities.11  In 
addition  to  this,  deliveries  of  carload  freight  are  usually  made 
more  quickly  than  those  of  less-than-carload  freight.  These 
facts  make  it  advantageous  to  ship  in  large  lots  and  give  a 
decided  advantage  to  those  who  can  do  so.12  The  difference 

"Governing  decisions  of  the  Interstate  Commerce  Commission  are: 
Thurber  v.  N.  Y.  C.  &  H.  R.,  3  I.  C.  C.  473;  Harvard  Co.  v.  Pennsyl- 
vania Co.,  4  I.  C.  C.  212,  213. 

12  The  wholesale  grocers  have  complained  that  the  large  meat  packers 
gain  an  advantage  of  this  kind  because  they  are  allowed  to  ship  grocery 
products  in  meat  cars,  which  receive  preferred  treatment  by  the  rail- 
roads because  they  carry  perishable  meat,  whereas  the  wholesale  grocers 
have  to  ship  by  ordinary  freight.  They  further  complained  that  the 
packers  shipped  groceries  in  their  "route  cars,"  which  are  carried  from 


298  PRINCIPLES  OF  MARKETING 

between  less-than-carload  and  carload  rates  is  particularly 
important  when  transportation  chargesjnake  up  a  large  part 
of  the  final  cost  of  the  product.  This  is  usual  with  bulky 
articles  of  relatively  low  value,  such  as  grains,  live  stock,  ores, 
and  crude  steel  products.  The  expense  of  shipping  in  very 
small  lots  is  usually  relatively  great.13  The  minimum  freight 
rate,  for  example,  is  based  on  one  hundred  pound  units.  It  is 
these  conditions  which  make  necessary  the  concentration  of 
farm  products  at  country  shipping  points,  and  which  usually 
make  it  cheaper  for  «  -rptfljjejr  to  buv  from  a  jobber  or  the 
near-by  branch_jiLasm.anufacturer,  than  to  buy  direct  from  a 
distant  producer,  and  for  the  final  consumer  to  buy  from  the 
retailer  rather  than  of  the  producer. 

Carload  Rates  and  Jobbing. — It  was  pointed  out  earlier  in 
tfee  chapter  that  the  development  of  railroads  has  tended  to 
continue  old  market  cities.  But  it  has  done  more  than  to 
continue  the  old  distributing  centers,  for  it  has  also  led  to 
the  development  of  new  ones.  The  differences  that  exist  be- 
tween carload  and  less-than-carload  rates  make  it  desirable 
to  transport  goods  in  carload  lots  jis_n£ar  to  the  final  pur- 
chaser as_Js_possible.  There  have  developed,  consequently, 
numerous  small  distributing  points  to  which  goods  are  brought 
in  carload  lots,  to  be  used  at  the  point  of  receipt"  and  to  be 
dispersed  in  less-than-carload  lots  throughout  the  tributary 
territory.  Just  as  soon  as  a  city  and  its  vicinity  can  use  goods 
in  carload  lots  it  is  on  the  way  to  become  a  jobbing  center.14 

town  to  town  to  make  deliveries  of  meat,  and  from  which  groceries 
were  also  delivered.  By  the  "consent  decree"  of  1920  the  packers  agreed 
not  to  handle  certain  large  classes  of  grocery  products. 

"Smaller  packages,  and  articles  demanding  very  rapid  transportation 
are  usually  carried  by  express  or  parcel  post.  The  rates  for  this  service 
are  relatively  high.  But  in  addition  to  the  more  rapid  and  certain 
service,  delivery  service  is  also  provided.  See  E.  R.  Johnson  and  T.  W. 
Van  Metre,  Principles  of  Railroad  Transportation  (1916),  Chaps.  XIII 
and  XIV. 

14  See,  for  example,  the  discussion  of  Amarillo  and  Sweetwater,  Texas, 
in  the  Texas  Common  Point  Case,  26  I.  C.  C.  528. 


PHYSICAL  DISTRIBUTION  299 

This  tendency  becomes  greater  when  prices  are  much  affected 
by  transportation  costs,  or  when  speed  in  delivery  is  desirable. 
With  most  staple  commodities  both  of  these  are  important ;  and 
the  latter  is  a  particularly  important  consideration  in  the 
marketing  of  perishables. 

Groceries  juce,  consumed  in  such  large  amounts  and  the  cost 
and  speed  of  transport  are  so  important  that  there  are  hun- 
dreds of  jobbing  centers  for  groceries  in  the  United  States. 
The  same  conditions  exist  in  a  smaller  degree  in  the  distribu- 
tion of  drugs,  farm  machinery,  dry  goods,  and  hardware.15  In 
the  sale  of  jewelry,  women's  expensive  clothing,  and  musical 
instruments  they  are  less  important  and  there  is  a  much 
smaller  number  of  jobbing  points.  It  was  shown  in  Chapter 
VIII  that  the  growing  emphasis  on  a  rapid  retail  turnover  has 
strengthened  the  local  jobber  as  against  large  jobbing  houses 
located  in  the  larger  commercial  centers.  This  is  due  to  a  con- 
siderable extent  to  the  fact  that  he  can  make  a  greater  use 
of  carload  shipments  than  can  the  larger  houses,  and  he  makes 
a  minimum  use  of  less-than-carload  shipments.  This  prac- 
tice reduces  costs  of  transportation  and  enables  him  to  make 
more  rapid  deliveries,  because  carload  shipments  are  deliv- 
ered more  quickly  than  less-than-carload.  And  since  local 
jobbers  are  near  to  their  customers  they  can  deliver  by  truck 
or  at  least  their  small  shipments  can  be  made  more  quickly 
than  could  similar  shipments  from  distant  manufacturers  and 

15  C.  C.  Parlin  found  something  over  1200  jobbing  centers  in  the 
grocery  trade  in  1915  (An  Address  delivered  before  the  district  sales 
managers  of  the  Joseph  Campbell  Co.,  p.  7,  published  by  the  Curtis 
Publishing  Company,  1916);  the  five  large  meat  packers  alone  had  1120 
branch  houses  in  operation  in  1917  (Report  of  the  Federal  Trade  Com- 
mission on  the  Meat-Packing  Industry,  Summary  and  Part  7,  p.  153) ; 
there  were  twenty  distributing  centers  for  farm  machinery  in  1918,  each 
of  which  had  five  or  more  jobbing  houses  or  manufacturer's  branches, 
and  there  were  27  farm  implement  manufacturers  who  had  in  the 
United  States,  alone,  in  1918,  282  branch  houses,  and  sold  through  140 
jobbers.  And,  in  addition  to  these,  they  used  444  stock  transfer  houses. 
(Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices 
of  Farm  Implements  [1920],  pp.  52-54.) 


300  PRINCIPLES  OF  MARKETING 

jobbers.  When  freight  rates  are  increased  their  position  is 
made  yet  stronger,  for  their  transportation  advantages  are 
thereby  increased.  To  offset  these  disadvantages  the  large 
distributors  have  establishecLbranch  houses,16  and  railroads 
leading  from  the  larger  market  centers  have  introduced  pack- 
age cars  to  increase  the  speed  of  freight.  The  general  exten- 
sion of  the  mixe^  carload  privilege  has  served  to  cut  costs  of 
transportation.17  Large  jobbers  endeavor  to  have  the  dif- 
ferential between  carload  and  less-than-carload  shipments 
cut  down  so  that  they  can  compete  more  successfully  in  a 
wider  territory.18 

Some  Special  Features  of  Transportation  Service. — There 
are  many  special  features  of  freight  service  which  have  par- 
ticular effects  on  the  market  structure.  The  transportation 
service  of  the  express  companies  and  the  Government's  parcel 
post  are  built  around  the  railway  system  of  the  country. 
The  express  service  is  used  particularly  in  carrying  merchan- 
dise which  is  of  slight  weight  and  high  value — valuable  mer- 
chandise, printed  matter,  or  money,  jewelry,  precious  metals, 
and  valuable  documents,  which  the  railroads  will  not  take. 
Express  is  shipped  on  passenger  trains  and  on  special  express 
trains.  It  serves  particularly  in  the  transportation  of  com- 
modities which  require  more  rapid  transportation  and  delivery 
than  is  given  by  the  regular  freight  service.  In  addition  to 
more  rapid  transportation  the  service  includes  the  collection 
of  merchandise  from  the  shipper  and  its  delivery  to  the  con- 
signee. The  cost  of  this  service  to  the  shipper  is  in  the  neigh- 
borhood of  four  times  the  ordinary  freight  rates  for  the  same 

16  In  discussing  the  reason  for  their  establishing  branch  houses  Mr. 
E.  C.  Simmons  of  the  Simmons  Hardware  Company,  of  St.  Louis,  said 
in  1906:  "It  is  a  well  recognized  fact  that  in  many  cases  promptness  is 
a  more  important  and  determining  factor  in  getting  business  than  even 
price,  but  put  the  two  together  and  they  are  irresistible." — "A  Half  Cen- 
tury of  Hardware,"  Iron  Age,  Vol.  77  (Jan.  4,  1906),  pp.  145-148. 

"•Business  Men's  League  of  St.  Louis  case,  in  9  I.  C.  C.  318. 

18  Consolidated  Classification  Case,  54  I.  C.  C.  1,  16-19. 


PHYSICAL  DISTRIBUTION  301 

shipments,  and  so  only  goods  of  relatively  high  value  can  be 
shipped  by  express. 

Since  1912  the  Post  Office  Department  has  been  de- 
veloping a  parcel  post  service  which  duplicates  much  of  the 
service  performed  by  the  express  companies.  But  it  is  not  so 
complete  nor  so  satisfactory  for  many  shippers  as  is  the  ex- 
press service.  Goods  are  only  delivered,  they  are  not  collected 
from  the  shipper.  Losses  are  not  met  so  fully  by  the  govern- 
ment, and  rates  for  distant  traffic  are  higher.  But_iox-sh«rt 
traffic,  tl?P  PftFpl  Pnslt-  ""trp-nrr  rhruppr,  although  tV^p 

of    Tr>nn 


this  HvnntQgp  .,  T^p  great  development  of  rural 
deliveries  of  mail  is  also  a  decided  advantage  in  shipping 
to  country  districts,  for  the  express  service  maintains  no  rural 
delivery.  Uninsured  packages  may  be  shipped  very  cheaply 
by  parcel  post  and  the  losses  insured  in  outside  companies, 
or  the  shipper  may  be  willing  to  assume  any  losses,  or  the 
package  may  be  insured  through  the  post  office.19 

Refrigerator  cars  and  cold  storage  warehouses  make  it  pos- 
sible to  bring  the  perishable  products  of  distant  lands,  fruits, 
vegetables,  meats,  and  fish,  to  our  table,  and  enable  us  in  turn 
to  send  perishables  to  distant  markets.20  California,  Florida, 
Washington,  Michigan,  and  Central  American  fruit,  dressed 
meats,  and  early  southern  vegetables  could  not  reach  what 

*For  a  more  complete  description  and  comparison  of  these  services 
see  Johnson  and  Van  Metre,  op.  tit.,  Chaps.  XIII  and  XIV. 

20  It  is  assumed  that  the  reader  is  familiar  with  these  factors.  For 
fuller  discussions  see  L.  D.  EL  Weld,  Private  Freight  Cars  and  Amer- 
ican Railways,  Columbia  University,  Studies  in  History,  Economics, 
and  Public  Law,  Vol.  XXXI,  1908;  Report  of  the  Federal  Trade  Com- 
mission on  Private  Car  Lines  (1919),  and  on  the  Wholesale  Marketing 
of  Food  (1920);  E.  G.  Nourse,  The  Chicago  Produce  Market  (1917); 
also  the  more  general  discussions  in  Johnson  and  Van  Metre,  Principles 
of  Railroad  Transportation  (1916)  ;  and  L.  G.  McPherson,  Railroad 
Freight  Rates  in  Relation  to  the  Industry  and  Commerce  of  the 
United  States  (1909).  See  also  various  bulletins  of  the  U.  S.  Depart- 
ment of  Agriculture. 


302  PRINCIPLES  OF  MARKETING 

are  now  their  normal  markets  but  for  refrigeration.  A  further 
use  for  refrigerator  cars  is  found  in  winter  when  goods  are 
carried  which  would  freeze  in  ordinary  box  cars.  Heater  cars 
have  also  been  developed,  and  special  equipment  has  been  in- 
troduced for  carrying  other  products,  such  as  live  stock  and 
petroleum.  Special  stock  trains  are  run  from  growing  sec- 
tions to  central  markets.  There  are  also  fast  freight  lines 
for  perishable  foods,  the  purpose  of  which  is  to  have  the  re- 
frigerator cars  used  on  a  railroad's  lines  joined  in  special 
trains  to  run  at  top  speed  to  central  markets.21 

These  special  facilities,  which  were  developed  much  later 
than  the  railways,  were  first  introduced  by  interested  shippers. 
This  was  the  case  because  special  cars,  especially  the  refrig- 
erator cars,  were  expensive  and  required  inspection  and  atten- 
tion from  point  to  point — expenses  and  services  which  the  rail- 
ways were  not  willing  to  provide.  Furthermore,  refrigerator 
cars  are  used  during  only  a  part  of  the  year  and  must  go  from 
line  to  line  to  be  utilized  profitably.  The  fear  that  they  would 
not  prove  profitable  because  of  this  limited  seasonal  use,  and 
the  inability  of  individual  railroads  to  control  their  cars  when 
on  other  lines,  as  well  as  a  frequent  disinclination  to  allow 
cars  to  leave  their  lines,  have  all  proved  to  be  important 
causes  for  outside  ownership.  The  railroads  now  own  many 
of  these  private  cars,  and  so  to-day  private  car  lines  are  rela- 
tively unimportant  save  in  a  few  industries.22 

21  See  In  the  Matter  of  Private  Cars,  50  I.  C.  C.  652.    In  addition  to 
special  cars  and  boats,  pipe  lines  have  been  developed  for  the  transpor- 
tation  of  petroleum,  and  there  are  elevators,  belt  conveyors,  motor 
trucks,  and  other  special  means  of  transport. 

22  Private  cars  compose  now  about  6  per  cent  of  the  total  owned  by 
the  railroads.    The  ownership  of  this  specialized  equipment  by  large 
shippers  was  formerly  a  source  of  much  complaint  by  competing  ship- 
pers.   The  railways  paid  a  rental  for  the  cars  which  was  claimed  to  be 
so  large  as  to  amount  to  a  rebate,  and  competing  shippers  did  not  get 
good  service.    These  cars  are  now  under  the  control  of  the  Interstate 
Commerce  Commission,  and  the  problems  suggested  are  largely  solved. 
See,  however,  the  recent  complaint  of  the  wholesale  grocers  made  before 
the  Commission  of  the  uses  made  of  route  cars  by  the  meat  packers  in 


PHYSICAL  DISTRIBUTION  303 

Diversion  in  Transit. — The  diversion  of  cars  in  transit  is  a 
privilege  of  great  importance  to  shippers.  This  enables  a 
shipper  to  send  his  car  in  the  general  direction  in  which  he 
wishes  it  to  go,  without  his  deciding  upon  a  specific  market  at 
once.  When  the  caj*_rgaches  a  diversion  point  established  by 
the  railroad,  it  may  be  sent  to  the  specific  market  which  the 
shipper  then  believes  gives  the  greatest  promise.  This  ser- 
vice is  particularly  important  in  the  case  of  perishables  and 
of  products  long  on  the  way  to  market.  In  either  case  the 
demand  in  different  markets  may  change  while  the  goods  are 
en  route,  and  to  reach  the  best  market  they  must  be  diverted 
from  their  original  course.  In  the  case  of  perishables  this  is 
peculiarly  important,  because  TFieycannot  be  storecT"t?r"await 

without  delay  to  another  market  where  better  prices  can  be 
obtained.  Market  news  is  usually  so  inctmplete  that  it  is 
often  impossible  to  tell  at  the  time  of  shipment  whether  a 
particular  city  will  offer  a  good  market  by  the  time  a  car- 
load has  reached  it.  Furthermore,  products  sometimes  de- 
teriorate more  rapidly  than  is  anticipated  and  so  the  more 
distant  markets  cannot  be  reached  in  time.  But  when  the 
product  has  reached  a  diversion  point  the  shipper  or  his  rep- 
resentative can  determine  its  condition  and  so  he  is  better  able 
to  judge  what  city  offers  the  best  market.23  The  diversion 
privilege  allows  the  product  to  be  sent  on  from  point  of  origin 
to  the  final  market  at  the  through  rate  plus  a  small  diversion 
fee.24 

Somewhat  similar  services  are  the  privileges  of  milling  and 
storage  in  transit  which  are  accorded  wheat  shippers,  and  the 

carrying  products  which  compete  directly  with  the  wholesale  grocers. 
The  grocers'  side  of  the  case  is  presented  in  The  Case  Against  the 
Packers  as  seen  by  the  Wholesale  Grocers  of  the  South  (1919),  prepared 
by  Lewis  H.  Haney  for  the  Southern  Wholesale  Grocers'  Association, 
Jacksonville,  Fla. 

23  The  diversion  of  "tramp"  ocean  steamers  is  likewise  a  common 
practice. 

34  See  the  Reconsignment  Case.  47  I.  C.  C.  590;  53  I.  C.  C.  455. 


304  PRINCIPLES  OF  MARKETING 

provisions  for  compressing  cotton  while  en  route  to  the  market, 
and  for  the  storing  and  grading  of  wool  on  the  way  to  the  East 
from  western  growing  regions.  In  the  first  case,  wheatjmay 
be  sent  to  the  milling  point,  stopped  for  milling,  and  then 
shipped  on  to  the  market,  all  at  the  throughjrei^ht  rate, 
plus  a  transit  charge.  This  saves  paying  the  relativelyhlgner 
local  freight  rates  to  the  point  of  milling  and  from  the  point 
of  milling  to  the  market.  Shippers  are  also  allowed  in  some 
instances  to  ship  grain  and  live  stock  to  a  terminal  market, 
and  then  to  send  it  on  in  the  same  general  direction  at  a  rate 
less  than  the  regular  local  rate~irom  the*terrmft£rTio  the  final 
market  place.  This  tends  to  equalize  the  position  of  millers 
and  meat  packers  located  at  different  points.25  Similar  to  this 
is  the  privilege  of  compressing  cotton  bales  in  transit.  This 
service  is  necessary  in  order  that  the  large  bales  shipped  by 
the  grower  may  bte  reduced  to  a  more  suitable  size.  Usually 
the  local  shipper  pays  the  full  local  rate  to  the  compression 
point,  but  on  proof  of  reshipment  he  is  allowed  a  refund  of 
the  difference  between  the  local  rate  and  the  lower  through 
rate.26 

Cities  which  are  able  to  procure  privileges  such  as  those 
which  have  been  mentioned  for  products  passing  through  their 
section  of  the  country,  are  enabled  thereby  to  divert  a  large 
proportion  of  the  traffic  which  might  perhaps  pass  through 
other  points.27  This  tends  to  the  development  at  such  points 

35  See  J.  Chester  Bowen,  Wheat  and  Flour  Prices  Jrom  Farmer  to 
Consumer,  U.  S.  Bureau  of  Labor  Statistics,  Bui.  130  (1913),  pp.  26-27, 
and  the  following  Interstate  Commerce  Commission  Cases :  Substitution 
of  Tonnage,  24  I.  C.  C.  340;  Transit  Case,  25  I.  C.  C.  130,  26  I.  C.  C. 
204;  and  compare  Fabrication  in  Transit,  29  I.  C.  C.  76. 
•  "  See  Louisiana  Cotton,  46  I.  C.  C.  451 ;  Business  Men  of  Helena  v.  St. 
L.,  I.  M.  &  S.  Ry.  Co,  48  I.  C.  C.  490. 

27  St.  Louis  has  recently  been  made  such  a  diversion  point  for  lumber. 
Lumber  from  the  South  is  shipped  to  St.  Louis,  sold  by  the  selling 
agents  there  and  shipped  on  at  the  through  rate  from  point  of  origin 
to  the  final  market,  plus  a  nominal  shipping  charge  of  two  and  one-half 
cents  per  100  pounds.  Before  this  privilege  was  granted  the  local  rates 


PHYSICAL  DISTRIBUTION  305 

of  markets,  jobbing  centers,  storage  facilities,  a  milling  in- 
dustry, or  of  whatever  a  particular  rate  privilege  tends  to 
foster.28 

Transportation  Costs, — Since  the  transportation  charge  is 
a  distinct  part  of  the  final  cost  of  an  article  delivered  to  the 
consumer,  it  is  evident  that  the  cost  of  transportation  limits 
the  extent  of  a  market  available  to  a  given  producer,  manu- 
facturer, or  distributor.  Other  things  being  equal,  the  seller 
who  has  the  lowest  transportation  costs  on  the  materials, 
equipment,  and  supplies  which  he  uses  and  on  the  shipment 
of  his  product  to  market  can  sell  at  the  lowest  price,  makes 
the  greatest  net  profit,  and,  if  his  supply  is  great  enough,  may 
even  control  the  market.  Most  of  the  products  now  consumed 
would,  furthermore,  not  be  available  to  the  majority  of  the 
population  of  the  world  if  it  were  not  for  the  low  costs  of 
transportation  which  now  prevail.  Improved  methods  have 
brought  lowered  costs  as  well  as  superior  service. 

Even  to-day  the  cost  of  carriage  is  an  important  element. 
California  oranges  could  not  compete  in  eastern  markets  with 
those  of  Florida  were  it  not  for  the  relatively  low  freight 
rates  charged  on  their  shipments;  neither  could  Washington 
apples  compete  in  eastern  markets  with  those  of  Michigan  nor 
the  latter  with  those  of  New  York.29  Factories  are  usually 
placed  with  a  view  to  the  cost  of  transportation,  both  for  bring- 
to  and  from  St.  Louis  had  to  be  paid.  It  is  estimated  that  this  will 
save  $300,000  a  year  to  St.  Louis  lumber  interests.  See  the  statement  of 
W.  P.  Coyle,  traffic  commissioner  of  the  St.  Louis  Chamber  of  Com- 
merce, quoted  in  the  Chicago  Journal  of  Commerce,  July  20,  1921. 

28  An  idea  of  the  great  number  and  variety  of  these  special  privileges 
can  be  obtained  by  glancing  over  the  index  to  the  volumes  containing 
the  decisions  of  the  Interstate  Commerce  Commission.  A  wealth  of 
marketing  information  is  contained  in  the  discussions  of  the  cases  which 
come  before  the  Commission. 

"  With  the  increase  in  freight  rates  since  the  World  War  and  the  fall 
in  the  price  of  farm  products,  the  transportation  rate  has  become 
peculiarly  burdensome  to  the  farmer.  This  is  on  account  of  the  fact 
that  the  price  he  receives  is  the  price  at  the  central  market  less  the 
shipper's  margin  and  the  cost  of  transportation  from  the  local  market. 


306  PRINCIPLES  OF  MARKETING 

ing  raw  materials  and  other  supplies  to  the  factory  and 
for  carrying  the  finished  product  to  its  market.  Some  cities 
have  outdistanced  rivals,  with  otherwise  equal  natural  ad- 
vantages as  manufacturing  and  distributing  centers,  because  of 
the  lower  freight  rates  they  have  enjoyed  to  consuming  and 
raw  material  markets.  Great  productive  areas  of  the  globe 
are  as  yet  unopened  to  world  commerce,  not  merely  because 
their  transportation  services  are  meagre,  but  because  the  cost 
of  those  services  is  prohibitive.30 

The  railway  rate  on  particular  articles  often  has  little  ef- 
fect on  the  retail  price  of  goods.31  A  difference  of  several  cents 
a  hundred  pounds  in  the  rate  often  means  far  less  than  one 
cent  on  individual  items  sold  to  the  consumer.32  On  the  other 
hand,  such  differences  are  very  important  in  the  wholesale 
trade,  and  in  the  trade  in  bulky  articles.  They  may  be  suffi- 
cient to  cause  a  factory  to  procure  raw  materials  from  one 

Thus  if  the  wholesale  price  which  affects  his  local  market  is  one  dollar 
and  the  freight  rate  five  cents,  the  grower's  price  is  ninety-five  cents 
less  the  shipper's  spread.  If  the  freight  rate  becomes  ten  cents,  the 
grower's  price  becomes  but  ninety  cents,  less  the  shipper's  spread. 
See  pp.  440-443. 

80  Many  of  the  peculiarities  of  American  rate  structure  have  arisen 
from  the  desire  of  railways  to  obtain  and  keep  trade  for  the  particular 
territories  they  serve.  Note  the  early  rate  struggle  between  the  roads 
serving  Boston,  New  York,  Philadelphia,  and  Baltimore.  See  W.  Z. 
Kipley,  Railroads:  Rates  and  Regulation  (1912),  pp.  21-23,  and  Chaps. 
IV-VIII,  X-XI;  Logan  G.  McPherson,  op.  tit.,  Chap.  VII;  E.  R.  John- 
son and  G.  G.  Huebner,  Railroad  Traffic  and  Rates,  Chaps.  XVII,  XIX. 

31  The  freight  rate  on  most  consumption  goods  is  so  low  in  relation 
to  their  value  that  a  large  increase  in  rates  will  have  little  effect  on 
prices.    But  this  is  not  true  of  production  goods.    Thus  of  the  price 
of  coal  in  Chicago  in  1914  the  railway  freight  charge  was  nearly  two- 
fifths  of  the  retail  price  of  anthracite,  nearly  one-half  for  smokeless 
mine   run,  and   nearly   one-quarter   for   Southern    Illinois   bituminous. 
With    the    higher    rates   and   higher   prices    prevailing    in    1921    these 
amounts  were:   for  anthracite,  approximately  the  same,  for  smokeless 
mine    run,  two-fifths,   and   for   Southern   Illinois  bituminous,   approxi- 
mately the  same  as  before. 

32  F.  Andrews,  "Methods  and  Costs  of  Marketing,"  U.  S.  Department 
of  Agriculture,  Yearbook,  1909,  pp.  161-162. 


PHYSICAL  DISTRIBUTION 


307 


territory,  rather  than  from  another, 
or  a  retailer  to  buy  of  the  jobbers 
of  a  city  from  which  goods  can  be 
shipped  at  a  lower  cost.  Slight 
changes  in  rates  have  frequently 
caused  grave  dislocations  of  com- 
mercial relations  established  under 
a  former  rate. 

Certain  kinds  of  transportation 
are  cH^aper_thajijQtfeefsr  Rates  are 
usuallyTower  on  waterways  than  on 
railways.  For  some  products  the 
transportation  rate  from  San  Fran- 
cisco to  New  York  is  greater  than 
from  Hong  Kong  to  New  York.33 
The  low  rates  charged  on  water- 
ways with  which  railways  compete 
sometimes  force  the  railroads  to 
adopt  rates  between  points  con- 
nected by  waterways  which  are 
much  lower  than  the  rates  for  the 
same  service  between  points  not  so 
favored.34 

Local  Trucking. —  Railroad  and 
steamship  lines  are  not  the  only 
factors  in  the  determination  of 
transportation  costs.  Of  particular 
importance  is  trucking.  At  each 
end  of  a  shipment  over  railway  or 

33  For  a  discussion   of  this  and   many 
other    cases    in    American    railway    his- 
tory, see  L.  G.  McPherson,  op.  cit. 

34  Since    ocean    freight    rates    are    sub- 
ject   to  'constant    change,    facts    of   this 
kind  change  likewise — although  the  gen- 
eral   relationship    is    not    likely    to    be 
materially  altered. 


GROWER 


Handling 


Trucking 


Handling 


I    COUNTRY  ELEVATOR  | 
I  Handling 


| Handling | 

I 
|  TERMINAL  ELEVATOR  | 

|  Handling  \ 

|  Railroad  ( 

I 

|  Handling  \ 

I  MILL  I 


Handling 


|     Trucking  or  Railroad 

~~ 


Handling 


WHOLESALER 


Handling 


Railroad 


Handling 


Trucking 


Handling 


RETAILER 


Handling 


Trucking 


Handling 


CONSUMER 


DIAGRAM  VI.— The  Physical 
Handling  of  Wheat,  from 
Grower  to  Consumer. 


308  PRINCIPLES  OF  MARKETING 

waterway  there  is  usually  an  element  of  local  trucking  or 
carrying  that  may  be  as  costly  as  the  through  carriage  or 
even  more  costly  than  it  is.  The  farmer  draws  his  grain 
to  the  country  elevator  whence  it  goes  over  the  railroad  to 
the  milling  center  where  it  may  be  unloaded  directly  at 
the  mill  warehouse  or  may  have  to  be  transported  again  by 
truck.  It  is  loaded,  as  flour,  from  the  mill  to  ship  or  car, 
and  then  at  the  end  of  its  journey  is  transferred  by  truck 
or  wagon  to  the  jobber's  warehouse,  from  which  it  must  be 
carried  to  the  retail  store,  and  from  there  to  the  home  of  the 
final  consumer.  It  was  estimated  in  1912  that  the  costof, 
carrying  grains-Jrojn  farm  to  car  was  as  great  as  the  cost  of 
railway  transportation.35  If  this  is  true  it  is  evident  that  the 
total  of  all  trucking  and  carrying  costs,  other  than  railroad,  is 
very  much  in  excess  of  the  costs  of  the  railroad  service.  In  1917 
household  goods  could  be  carried  from  New  York  to  Wilming- 
ton, Delaware,  by  motor  truck  for  less  than  by  railway 
freight,  and  the  cost  of  hauling  the  goods  to  and  from  the 
railroad  and  the  cost  of  packing  them  for  freight  shipment 
were  avoided  when  the  goods  were  shipped  by  motor  truck. 
The  importance  of  the  physical  handling  of  products,  includ- 
ing trucking,  is  shown  in  Diagram  VI  and  Table  VII. 

In  view  of  the  enormous  amount  of  hauling  on  the  com- 
mon roads  and  streets  it  is  obvious  that  anything  that  elim- 
inates the  necessity  for  it,  or  reduces  the  time  and  expense  it 
involves,  will  have  a  very  important  effect  upon  the  cost  of 
transportation,  and  hence  upon  the  cost  of  marketing.  Some 
of  the  means  for  bringing  this  about  are  the  location  of  fac- 
tories on  railroad  or  waterway,  the  location  of  central  produce 
markets  near  terminals,  the  reduction  of  deliveries  to  consum- 
ers, and  the  improvement  of  highway  transportation.36 

35  See  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products  (1915),  Chaps. 
IX-XI. 

38  Chicago  has  an  underground  railroad  with  60  miles  of  tracks  which 
connect  the  freight  depots  with  some  of  the  large  warehouses  of  the 
"loop"  district. 


PHYSICAL  DISTRIBUTION  309 

TABLE  VII.    CARTAGE  COSTS  IN  WASHINGTON,  D.  C  * 

Percentage  of 

Delivery  Costs 

Business  to  Gross  Sales 

Ice    45.6 

Soft  drinks  20.2 

Brick    19.9 

Bakeries    19.8 

Laundries 15.3 

Coal  and  wood 15.2 

Ice  cream   14.9 

Dairy  products   12.1 

Breweries    9.2 

Lumber    .* 6.8 

Groceries  and  meat  4.4 

Hardware    . .  ^ 3.0 

Furniture  and  carpets 2.8 

Department  stores,, hatters,  furriers,  and  shoes...       1.5 
Wholesale  meats    1.1 

*  E.  F.  Hartley,  Study  of  Cartage  Costs  in  the  City  of  Washington  (1917), 
pub.  by  the  U.  S.  Census  Bureau.  See  also  Chicago  Tribune,  Motor  Trucks 
in  the  Chicago  Territory  (1918),  p.  26. 

The  World  War  stimulated  and  improved  trucking  in  the 
United  States.  Motor  trucks  now  transport  appreciable  quan- 
tities of  goods  from  city  to  city.  They  also  increase  the  area 
from  which  goods  can  be  conveniently  hauled  to  and  from  a 
railway  or  waterway,  as  well  as  the  natural  hauling  area 
surrounding  a  particular  market.  A  much  larger  producing 
and  consuming  area  can,  consequently,  be  brought  into  touch 
with  the  main  arteries  of  traffic.  Increased  speed  in  delivery 
likewise  results.  In  the  opening  of  larger  farm  areas  alone  it 
is  evident  that,  through  increasing  the  cultivable  areas  that 
can  be  profitably  utilized,  this  may  bring  a  large  increase  of 
products  available  to  the  market.  Improved  highway  trans- 
portation is  also  causing  the  disappearance  of  the  country 
crossroads  store. 

II.    HANDLING  PRODUCTS  AT  TERMINALS 

Another  important  feature  of  physical  distribution  is  the 
handling  of  products  at  shipping  and  terminal  points. 


310  PRINCIPLES  OF  MARKETING 

Among  the  marvels  of  our  machine  age  are  the  facili- 
ties that  have  been  developed  for  loading  and  unloading 
commodities  at  transportation  points.  Derricks,  cranes,  grav- 
ity chutes,  cars  with  movable  bottoms,  traveling  belts  with 
buckets  attached,  steam  shovels,  and  similar  appliances  have 
all  contributed  to  increasing  the  speed  with  which  goods  can 
be  loaded  and  unloaded.  But  de.spite  these  improvements 
the  chief  cause  of  congested  conditions  in  transportation  is 
usually  found  at  shipping  and  terminal  points. 

A  large  amount  of  time  is  spent  in  loading  and  unloading 
cars,  vessels,  and  trucks.  It  involves  great  expense  for  labor, 
and  results  in  the  deterioration  of  many  products.  Railroad 
yards  in  particular  are  liable  to  congestion.37  The  switching 
of  cars  from  train  to  train,  from  train  to  warehouse,  track,  or 
unloading  platform,  and  the  reverse  process  of  making  up 
trains,  is  a  slow  and  expensive  process,  adding  greatly  to  the 
time  goods  must  be  en  route  and  reducing  the  effectiveness  of 
cars  for  purely  transportation  purposes.38 

Aside  from  the  mere  physical  difficulties  involved  in  unload- 
ing, the  traveling  life  of  a  car  and  the  use  which  can  be  made 
of  railway  tracks  are  further  reduced  because,  in  many  in- 
stances, those  receiving  goods  in  carloads  store  them  in  the 
car  until  they  can  be  sold  or  conveniently  unloaded.  To  offset 
this  tendency  railroads  have  instituted  what  are  known  as 
demurrage  charges.  These  are  per  diem  charges  levied  after 
the  "free  time,"  ordinarily  forty-eight  hours,  for  loading  or 
unloading  has  expired.  In  the  case  of  some  commodities  with 

"Discussion  of  the  relation  of  terminal  cost  to  total  transportation 
expense,  for  less-than-carload  freight  is  contained  in  the  C.  F.  A.  Class 
Scale  Case,  45  I.  C.  C.  254,  in  the  Southwestern  Class,  48  I.  C.  C.  379, 
387,  and  in  the  New  England  Case,  49  I.  C.  C.  421,  455. 

38  An  interesting  discussion  of  terminal  problems  at  transshipment 
points,  between  rail  and  water  transportation,  will  be  found  in  an  article 
by  C.  O.  Ruggles,  "Railway  Service  and  Regulation  in  Port  Terminals," 
The  American  Economic  Review,  Vol.  XI,  No.  3  (Sept.,  1921),  pp. 
438-446.  See  also  E.  J.  Clapp,  "An  American  Transportation  System," 
The  New  Republic,  Feb.  1,  1922,  pp.  267-270. 


311 


312  PRINCIPLES  OF  MARKETING 

which  this  difficulty  is  greatest,  and  where  track  and  yard 
space  are  limited,  what  is  known  as  track  storage  is  levied 
in  addition  to  the  usual  demurrage  charges.  Both  of  these 
charges  vary  from  time  to  time,  and  from  state  to  state.  A 
common  demurrage  charge  has  been  one  dollar  a  day.  In 
some  states  demurrage  charges  have  been  set  by  statute,  and 
in  a  few  "reciprocal  demurrage"  charges  are  assessed  the  rail- 
roads for  failure  to  supply  equipment  within  a  stipulated  time. 
Congestion  in  Terminal  Markets. — Although  the  purely 
mechanical  devices  used  in  transportation  have  been  rapidly 
improved,  the  adequacy  of  transport  systems  is  unduly  ham- 
pered by  the  unfortunate  congestion  in  the  districts  which  sur- 
round many  terminals  and  in  the  terminals  themselves.  An 
extreme  example  of  this  is  found  in  the  wholesale  produce 
markets  of  most  large  cities.  These  are  almost  universally 
poorly  situated  with  regard  to  the  railway  terminals  from 
which  they  secure  incoming  products.  They  are,  moreover,  fre- 
quently badly  located  as  regards  the  retail  stores  and  factories 
to  which  the  goods  are  to  be  delivered.39  This  usually  necessi- 
tates an  excessive  amount  of  trucking  from  scattered  railway 
terminals  through  crowded  business  streets  to  the  wholesale 
market,  and  then  further  trucking  from  the  wholesale  dis- 
trict to  outlying  factories  and  retail  stores,  and  even  back  to 
the  terminals  for  reshipment.  The  cost  of  this  lies  not  only 
in  the  trucking  expenses  but  in  the  deterioration  of  products 

39  "There  are  approximately  25  freight  terminals  in  the  city  [Chi- 
cago]. A  considerable  number  of  these  are  grouped  together  a  mile 
or  so  from  the  produce  district.  The  terminals,  however,  are  distinct 
from  each  other,  and  a  dealer  receiving  shipments  over  a  number  of 
different  railroads  must  send  for  them  to  as  many  different  terminals. 
For  about  five  months  of  the  year  fruits  and. vegetables  are  received  by 
water  from  Michigan  and  Wisconsin  and  must  be  hauled  by  teams 
from  the  docks  to  the  markets." — Report  oj  the  Federal  Trade  Com- 
mission on  the  Wholesale  Marketing  oj  Food,  p.  64.  The  same  general 
conditions  prevail  in  many  other  large  cities,  and  are  described  in  this 
report. 


PHYSICAL  DISTRIBUTION  313 

which  results  from  their  being  jostled  about  in  this  way  for 
considerable  periods  of  time. 

The  causes  of  this  congestion  are  partly  fundamental.  The 
concentration  of  wholesaling  makes  purchase  and  sale  easy, 
but  the  concentration  of  the  goods  which  accompanies  it  leads 
to  physical  c.ongestion.  The  planlessness  of  our  cities  is  a 
further  cause.  Many  produce  markets  were  originally  estab- 
lished so  as  to  be  convenient  to  water  transportation.  At  the 
present  time,  however,  relatively  little  produce  comes  in  by 
water,  and  the  railway  terminals  are  at  a  distance  from  the 
market  places.  But  the  markets  continue  at  the  original 
points.40  American  cities,  furthermore,  have  grown  so  rapidly 
that  few  have  been  able  to  foresee  the  future,  and  conse- 
quently no  adequate  provision  has  been  made  to  care  for  the 
proper  relationship  of  transportation  facilities  to  wholesale 
markets,  industrial  centers,  and  retail  districts. 


III.    STORAGE 

The  second  function  of  physical  supply  is  storage.  The 
farmer  and  other  prime  producers  store  the  products  which 
they  harvest,  or  extract  from  nature,  until  they  are  started  on 
the  way  toward  mill,  refinery,  factory,  and  final  consumer. 
Farm  products  and  raw  materials  are  stored  at  local  shipping 
points  until  enough  are  accumulated,  or  until  the  prevailing 
price  is  sufficiently  attractive  to  warrant  shipment.  They  are 
stored  at  central,  secondary,  and  retail  markets  until  further 
sale  and  shipment  take  place,  and  they  are  stored  at  mills  and 
factories  before  and  during  processing.  Manufactured  prod- 
ucts, in  turn,  are  stored  at  the  factory  until  they  are  sold  and 
shipped  to  market.  And  between  the  factory  and  the  con- 

40  For  a  detailed  discussion  of  these  problems  see  E.  G.  Nourse,  The 
Chicago  Produce  Market,  and  the  Report  of  the  Federal  Trade  Com- 
mission on  the  Wholesale  Marketing  oj  Food. 


314  PRINCIPLES  OF  MARKETING 

sumer  they  are  stored  in  the  warehouses  of  the  manufactur- 
er's branch,  the  public  warehouseman,  the  wholesaler,  and  the 
retailer. 

Causes  for  Storage. — Storage  is  necessary  to  the  extent  that 
the  production  and  use  of  goods  and  their  supply  and  demand 
in  the  market  are  not  equalized.  Its  function  is  to  hold 
goods  from  the  time  they  are  produced  until  the  time  they 
are  used,  in  order  to  bring  about  an  adjustment  between  pro- 
duction and  use.  It  has  likewise  an  auxiliary  use  in  assisting 
the  transfer  of  commodities  from  place  to  place.  For  goods 
are  in  storage  while  they  are  being  shipped,  and  because  of 
the  economies  in  large  scale  transportation,  and  because  ship- 
ments are  sometimes  delayed,  storage  is  essential  to  the  ad- 
justment of  supply  between  places  of  surplus  production  and 
surplus  consumption.  The  important  conditions  which  make 
storage  necessary  to  marketing  are,  then,  the  conditions  which 
make  necessary  an  adjustment  between  times  and  places  of 
surplus  production  and  times  and  places  of  surplus  consump- 
tion. They  are  as  follows: 

1.  Goods    produced    during   a    short    season   of   the   year 
must  be  held  over  if  they  are  to  be  consumed  in  other 
seasons. 

2.  Goods  which  are  consumed  in  large  volume  during  short 
seasons   are  often  produced  more   economically   if   the 
season  of  production  can  be  lengthened.     The  resulting 
surplus  must  be  held  over. 

3.  The  sale  of  abnormally  large  stocks  at  one  time  often 
depresses  the  market  price.    If  the  goods  can  be  stored 
the  price  can  be  steadied,  and  losses  to  holders  thereby 
avoided  or  reduced  through  the  realization  of  a  higher 
price  in  a  later  market. 

4.  A  surplus  in  one  market  can  sometimes  be  stored  until 
transportation  facilities  can  be  secured  to  take  it  to  a 
more  promising  market. 

5.  Factories  and  dealers  must  store  surplus  supplies  and 


PHYSICAL  DISTRIBUTION  315 

merchandise.  There  are  several  causes  for  this:  to  take 
advantage  of  quantity  prices  in  purchasing  and  of 
quantity  rates  for  transportation,  to  guard  against  de- 
layed shipments,  to  have  enough  goods  on  hand  to  meet 
variations  in  demand  from  day  to  day  and  from  week 
to  week. 

Two  Kinds  of  Storage.  —  The  conditions  which  make  it 
necessary  to  hold  goods  are  of  two  general  types;  and,  con- 
sequently, there  are  two  kinds  of  storage  service.  First  should 
be  placed  the  class  of  storage 


^eriodoftime,  detejaodnMJiy_Jej2ipoF^ 
andby^Ene  short  time  problems  of  relating  supply  to  demand. 
If  there  is  a  temporary  glut  in  the  market  for  perishable  goods, 
they  may  be  held  over  for  a  few  days  awaiting  a  higher  price. 
Merchants  buy  goods  in  large  quantities,  and  these  must  be 
held  until  they  are  sold  and  delivered.  The  manufacturer 
stores  raw  materials  until  they  are  processed  and  finished 
goods  until  they  are  shipped  to  market.  Goods  are  in  storage 
while  in  transit  and  commonly  for  some  time  before  and  fol- 
lowing shipment. 

'he  second  class  of  storage  service^is.  that  wbidijnakes  it 
possibleTo  adjust  supply  anoTdemand  for  products  jwhjcji_are, 
produced  or  consumed  seasonally.  Eggs,  butter,  wheat,  cot- 
ton, and  wool  are  stored  from  periods  of  abundance  to  periods 
of  scarcity.  Iron  ore  from  the  Lake  Superior  district  is  ac- 
cumulated neat  the  steel  mills  in  large  quantities  during  the 
summer.  None  can  be  shipped  on  the  lakes  after  the  close 
of  transportation  in  the  fall.  Coal  likewise  is  shipped  on 
the  lakes  to  the  Lake  Superior  ports  to  be  stored  for  winter 
use.  And  when  a  manufacturer  produces  for  stock  throughout 
the  year  goods  which  have  a  short  selling  season,  this  kind  of 
storage  service  is  needed.  f 

Nature  of  Storage  Service.  —  Five  important  considerations 
are  involved  in  the  storage  of  goods  : 


316  PRINCIPLES  OF  MARKETING 

1.  They  must  be  properly  cared  for. 

2.  They  must  be  stored  at  convenient  points. 

3.  Stocks  must  be  financed  while  in  storage. 

4.  Storage  must  be  so  controlled  as  to  protect  the  interests 
of  all  parties  involved. 

5.  Storage  has  an  important  effect  on  prices. 

Care  of  Merchandise. — The  proper  care  of  goods  in  storage 
is  necessary  if  the  purposes  of  the  service  are  to  be  realized 
in  full  degree.  They  must  not  only  be  kept  in  merchantable 
condition — if  possible  in  as  good  condition  as  they  were  when 
they  were  put  in  storage — but  it  is  often  possible  to  improve 
their  quality  or  condition  in  ways  which  make  them  more  de- 
sirable for  consumption  and  more  available  for  sale.  Lumber 
is  seasoned,  smoked  meat  and  tobacco  are  cured,  and  economies 
may  be  effected  by  harvesting  a  green  crop  of  fruit  and  al- 
lowing it  to  ripen  in  storage.  This  service  involves  the  in- 
spection, preservation,  conditioning,  and  grading  of  products. 
Proper  provision  for  the  safety  of  the  merchandise  calls  for 
protection  from  theft,  fire,  wind,  water,  heat,  cold,  vermin, 
animals,  and  from  natural  deterioration.  Goods  must  be  in- 
spected on  arrival  and  on  delivery,  as  well  as  from  time  to 
time  during  storage,  to  determine  their  physical  condition. 
Perishable  goods  in  particular  must  be  given  attention.  This 
usually  involves  the  installation  of  special  equipment  to  pro- 
vide "cold"  and  heat,  in  order  to  maintain  proper  temperatures 
for  fruits,  vegetables,  eggs,  butter,  meat,  and  it  involves  the 
provision  of  special  machinery  for  cleaning  and  conditioning 
grain — to  keep  it  from  heating  in  the  bin  or  spoiling  from  col- 
lecting too  much  moisture.  Finally,  goods  are  frequently 
assorted  and  graded  while  in  storage  so  as  to  meet  more  nearly 
the  demands  of  the  market.41 

41  An  interesting  development  in  warehousing  is  the  Bush  Terminal 
in  New  York  City  which  provides  many  facilities  not  generally  pro- 
vided by  warehousemen,  see  The  Bush  Magazine,  Aug.  15,  1917,  and 
other  issues.  Descriptive  material  can  also  be  secured  from  the  Bush 
Terminal  Company. 


PHYSICAL  DISTRIBUTION  317 

Place  of  Storage. — Several  considerations  bear  on  the  de- 
termination of  the  most  convenient  place  at  which  goods  shall 
be  stored.  They  arise  out  of  the  need  to  make  the  storage 
facilities  serve  with  equal  advantage  the  interests  and  require- 
ments of  the  producer,  middleman,  manufacturer,  and  final 
consumer.  Furthermore,  the  facilities  must  be  located  at 
points  which  will  expedite  the  transportation  of  goods,  and 
make  them  most  available  as  security  for  the  loans  with  which 
their  storage  and  distribution  is  financed.  Goods  which  have 
left  the  place  of  production  and  which  are  en  route  to  the 
places  of  consumption  tend,  consequently,  to  be  stored  near 
to  transportation  facilities,  near  to  the  markets  in  which  they 
are  bought  and  sold,  and  near  to  the  financial  agencies  which 
provide  the  funds  invested  in  them.  This  causes  surplus  sup- 
plies to  be  stored  close  to  the  large  commercial  centers  where 
the  means  of  transport,  exchange,  and  finance  are  concen- 
trated. With  improvements  in  the  speed  of  transportation 
and  reductions  in  its  costs  this  tendency  may  be  accentuated. 
Supplies  for  consumption  and  manufacture  can  be  quickly 
secured  from  central  markets  and  so  the  need  for  storing  in 
large  quantities  close  to  the  consumer  has  been  minimized.42 
A  further  cause  for  the  concentration  of  warehousing  in  cen- 
tral markets  is  the  fact  that  the  inspection  and  supervision 
of  warehousesjfi  important  to  thoir  proper  functioning  in  the 
care  of  products  which  are  tobe^jisprl  as  the--kasis"for'1oans, 
and  which  are  to  be  sold  on  the  basis  of  samples.  This  is 
more  effectively  done  on  a  large  scale  near  to  the  agencies 
most  directly  involved.  The  economies  _in  transportation^and 
distribution  in  large  amaJnts^m^eTtTdesirable  to  locate  ware- 
house iac'illtle^  whefe~lnerchants  who  buy  in  large  amounts 
concentrate.  vThere  is,  therefore,  a  further  need  for  storage 
facilities  at  those  jobbing  markets  at  which  wholesalers, 
manufacturers'  branch  houses,  and  transfer  points  are  lo- 
cated.43 

42  This  makes  possible  a  more  rapid  stock-turn.    See  pp.  201-205. 

48  "In  order  to  save  freight  by  car  lot  shipments  and  to  have  imple- 


318  PRINCIPLES  OF  MARKETING 

Finance  and  Storage. — It  is  as  a  consequence  of  the  long 
time  through  which  many  products  must  be  stored  and  the 
great  volume  in  which  this  is  done  that  some  of  the  greatest 
problems  of  market  finance  arise.  For  during  the  whole  time 
that  goods  are  in  storage  funds  are  invested  in  them.  These 
may  be  the  funds  of  the  producer,  middleman,  financial  agency, 
manufacturer,  or  consumer.  But  whoever  furnishes  the  cap- 
ital must  bear  the  risk  of  losing  his  investment  through  the  loss 
of  the  goods  by  deterioration  or  theft,  or  from  the  conse- 
quences of  a  falling  market.  Because  of  the  importance  of 
this  aspect  of  storage  great  attention  is  commonly  paid  to  the 
relation  between  warehousing  and  finance.  The  goods  stored 
are  often  the  security  for  loans  made  by  banks  or  the  credit 
allowed  by  supply  houses.  To  expedite  financing,  the  ware- 
house receipt  has  been  developed  to  a  high  degree  by  associa- 
tive activity  and  by  law,  until  it  now  exercises  in  many  trades 
the  same  function  in  financing  as  is  exercised  by  the  bill  of 
lading.  In  fact,  it  often  happens  that  in  the  progress  of  goods 
to  a  market,  both  bills  of  lading  and  warehouse  receipts  serve 
alternately  as  collateral  security  for  the  loans  which  finance 
the  exchange  from  the  time  the  goods  leave  the  producer  until 
they  are  finally  absorbed  in  manufacture  or  in  retail  trade.44 

The  risk  of  financial  loss  to  those  who  have  purchased  goods 
and  to  those  who  have  loaned  the  money  with  which  these 
purchases  were  made,  makes  it  imperative  that  every  safe- 
guard be  provided  to  insure  against  loss  while  the  goods  are 
in  storage.  The  important  conditions  essential  to  proper  ware- 

ments  and  repairs  readily  available  to  retailers  or  farmers,  some  manu- 
facturers have  transfer  points  which  are  no  more  than  distributing 
stations  located  at  various  centers  where  no  branch  house  is  main- 
tained."— Report  of  the  Federal  Trade  Commission  on  the  Causes  of 
High  Prices  of  Farm  Implements  (1920),  p.  58. 

"See  Chap.  XVI;  also  R.  L.  Nixon,  Cotton  Warehouses,  U.  S.  De- 
partment of  Agriculture,  Office  of  Markets  and  Rural  Organization, 
Bulletin  216  (1916),  pp.  2-5,  and  Wm.  B.  Thompson,  "The  Warehous- 
ing of  Cotton,"  The  Manufacturers'  Record,  Supplement,  Oct.  23,  1919, 
p.  63c. 


PHYSICAL  DISTRIBUTION  319 

housing,  from  the  financial  side,  are  best  discussed  from  the 
point  of  view  of  the  banker,  or  loaner  of  funds.  These  are 
usually  of  equal  importance  to  the  owner  of  the  goods,  but 
since  he  may  have  them  stored  in  his  own  warehouse  the 
points  are  not  all  of  equal  importance  to  him.45  (1)  The 
goods  must  be  stored  under  proper  conditions  in  warehouses 
controlled  by  firms  which  are  reliable  and  responsible  for 
the  proper  performance  of  the  storage  functions.  Since  the 
return  for  the  money  invested  in  them  is  contingent  on  the 
merchantable  condition  of  the  goods,  care  for  their  proper 
storage  is  of  the  greatest  importance.  This  involves  proper 
facilities  for  the  physical  care  of  the  goods,  and  provision  for 
insurance  against  fire  and  theft.  (2)  Although  salable  goods 
are,  in  the  last  analysis,  the  security  for  the  funds  invested, 
they  are  of  little  value  as  security  unless. -the-titl€--tcr-thgrn 
is  clearly^La.  the  haiidL!  uf  Uu^injergsted  party .^  This  is  usually 
given  by  a  warehouse  receipt  representing  the  goods  stored. 
And  the  safety  of  the  invested  funds  is  not  properly  safe- 
guarded unless  this  receipt  gives  a  clear  title  to  the  goods  to 
the  holder  of  the  receipt.  It  was  in  large  part  to  make  this 
title  secure  that  the  United  States  Warehouse  Act  was  passed 
in  1916,46  and  it  is  with  this  in  view  that  uniform  state  laws 
are  urged  so  that  banks  can  be  certain  of  the  status  of  the 
security  for  the  loans  they  make.47  (3)  It  is  necessary  that 
the  value  of  the  goods  on  which  loans  are  made  shall  be  ac- 
curately determined.  As  a  result  the  quality  and  grade  of 
the  goods  involved  must  be  known  in  order  that  their  exact 

46  See  Manufacturers'  Record,  Supplement,  Oct.  23,  1919,  pp.  65  ff. 

46  See  U.  S.  Department  of  Agriculture,  Bureau  of  Markets,  Service 
and  Regulatory  Announcements,  No.  61    (June  2,   1920),  Information 
Concerning   the    United  States    Warehouse   Act.    This   is   equally   im- 
portant in  transportation,  and  is  responsible  for  the  passage   of  the 
Uniform  Bill  of  Lading  Act,  see  C.  S.  Duncan,  "The  Uniform  Bill  of 
Lading,"  Journal  of  Political  Economy,  Vol.  XXV  (1917),  pp.  679-703. 

47  Mechanics'  lien  laws,  for  example,  sometimes  give  prior  claim  to  the 
laborers  who  produce  goods,  and  may  prevent  banks  from  obtaining 
title  to  the  goods. 


320  PRINCIPLES  OF  MARKETING 

market  value  can  be  ascertained.  If  in  addition  to  this,  the 
goods  have  been  sold  for  future  delivery,  or  their  future  value 
has  been  assured  through  hedging,  their  value  as  security  for 
a  loan  is  thereby  enhanced.  Here  again  the  necessity  for 
proper  storage  is  important,  so  that  the  quality  of  the  goods 
may  be  maintained  until  the  loan  is  paid  off. 

Control  of  Storage  Facilities. — Storage  is  carried  on  both 
as  an  adjunct  to  private  business  and  as  a  public  service 
business.  Factories,  wholesale  middlemen,  and  retailers  usu- 
ally have  their  own  storage  plants  in  which  to  ware- 
house the  materials  they  use  or  sell.  But  agricultural 
products  on  reaching  the  market,  whether  they  be  used 
for  consumption  or  as  raw  materials  for  manufacture, 
are  often  stored  in  public  warehouses.48  In  central  markets, 
especially,  many  warehouses  are  owned  and  operated  by  private 
companies  for  the  express  purpose  of  providing  storage  service. 
Grain,  cotton,  and  tobacco  when  not  placed  in  the  private 
warehouses  of  buying  merchants  are  stored  thus,49  and  much 
cold  storage  business  is  done  in  public  plants.  Manufactured 
products,  likewise,  are  frequently  stored  in  public  warehouses 
located  in  wholesale  centers.50 

48  There  are  248  cotton  warehouses  licensed  under  the  United  States 
Warehouse  Act  listed  in  Service  and  Regulatory  Announcements,  No. 
68  of  the  United  States  Bureau  of  Markets,  May,  1921.    This  number 
had  been  doubled  by  September  1.    Rapid  progress  is  also  being  made 
with  the  licensing  of  grain  and  wool  warehouses. 

49  The  grain  storage  capacity  of  the  United  States  has  been  estimated 

as  follows: 

Capacity 
Number  in  Bushels 

Terminal   warehouses    351       .        262,000,000 

Country  warehouses    20,589  521,000,000 

Mills    7,213  150,000,000 

From  Address  oj  Julius  H.  Barnes  to  the  Committee  of  Seventeen, 
Nov.  5,  1920,  p.  16. 

60  This  is  illustrated  by  the  practice  of  some  agricultural  machinery 
manufacturers  who  store  machinery  and  equipment  at  wholesale  centers 
in  which  they  have  no  branch  house.  See  Report  of  the  Federal  Trade 


PHYSICAL  DISTRIBUTION  321 

The  control  of  warehouses,  more  especially  of  public 
warehouses,  is  an  important  element  in  the  successful  storage 
of  products.  It  is  especially  important  to  the  financing  of 
marketing,  since  a  large  part  of  the  stocks  of  raw  materials 
and  foods  and  an  appreciable  part  of  the  supplies  of  manu- 
factured goods  are  stored  by  independent  warehouse  concerns. 
The  owners  of  goods  are  often  unable  to  supply  their  own  stor- 
age space  and,  furthermore,  the  service  is  often  better  ren- 
dered and  more  cheaply  supplied  when  carried  on  on  a  large 
scale  by  independent,  specialized  agencies.  From  the  point  of 
view  of  the  owner  of  goods,  the  chief  service  of  the  public 
warehouse  is  to  provide  a  place  in  which  the  goods  can  be 
safely  stored  and  properly  safeguarded,  and  to  furnish  to 
the  owner  a  negotiable  receipt  indicating  the  kind  and  grade 
of  product  stored,  the  amount  stored,  and  the  ownership.51 
Its  function  is  to  store  surplus  supplies  of  seasonal  goods,  to 
hold  goods  when  the  market  is  unsatisfactory,  and  to  carry 
supplies  for  manufacturers  and  merchants.  Warehousemen 
sometimes,  too,  serve  as  financial  middlemen  as  well  as  storage 
agents,  either  through  advancing  funds  directly,  or  assisting 
the  owner  in  borrowing  from  financial  houses.52 

The  rates  which  are  charged  and  the  service  which  is  ren- 
dered by  public  warehouses  are  often  regulated  by  the  state 
much  as  are  public  utility  rates  and  service.  This  is  done 

Commission  on  the  Causes  of  High  Prices  of  Farm  Implements,  p.  58. 
Meat  packers  have  "storage  and  delivery"  houses,  local  merchants  who 
store  goods  as  shipped  and  deliver  to  customers  secured  by  the  packers' 
salesmen.  See  Report  of  the  Federal  Trade  Commission  on  the  Meat- 
Packing  Industry,  Vol.  IV  (1919),  p.  37. 

"Fungible  goods,  particularly  grains,  are  commonly  stored  together. 
No  effort  is  made  to  keep  each  owner's  goods  separated;  when  delivery 
is  demanded  the  proper  quantity  and  grade  must  be  delivered,  but  not 
the  identical  goods. 

MCold  storage  warehousemen  sometimes  assist  shippers  in  financing 
their  purchases.  See  E.  G.  Nourse,  The  Chicago  Produce  Market 
(1917),  pp.  90-91. 


322  PRINCIPLES  OF  MARKETING 

mainly  to  avoid  discrimination  between  users.  Goods  are 
commonly  inspected  on  entering  the  public  warehouse  so  as 
to  determine  the  responsibility  of  the  warehouse  for  their 
condition  and  quality.  In  the  grain  trade  the  terminal  eleva- 
tors are  often  licensed  and  controlled  by  the  local  exchange 
as  well  as  by  the  state  or  Federal  Government.53  For  when 
grain  is  sold  for  future  delivery,  contracts  are  met  by  the 
delivery  of  warehouse  receipts,  and  successful  trading  necessi- 
tates confidence  in  these  receipts. 

Storage  and  Prices. — Storage  has  an  important  effect  on 
prices.  By  making  it  possible  to  hold  surplus  products 
over  from  periods  of  surplus  production  to  be  consumed  uni- 
formly throughout  the  year,  it  helps  in  the  adjustment  of 
supplies  to  the  needs  of  consumers,  and  thereby  exerts  an  in- 
fluence in  stabilizing  prices  throughout  the  year.  When  sur- 
plus supplies  are  kept  off  the  market,  prices  are  raised  during 
periods  of  abundance  and  consumption  is  thereby  reduced,  so 
that  the  supplies  are  consumed  more  uniformly.  Again,  since 
stored  goods  can  be  used  as  the  basis  for  loans,  it  is  possible 
for  those  who  produce  goods  which  are  consumed  sea- 
sonally to  use  the  produced  goods  as  security  for  loans, 
and  they  are  thereby  enabled  to  produce  more,  uniformly 
throughout  the  year.  This  permits  manufacturers  to  iron 
out  production  peaks,  and  so  it  results  in  improved  pro- 
duction and  reduced  costs.54  Temporary  gluts  in  the  market 
can  be  avoided,  as  well  as  temporary  shortages,  because  goods 
can  be  stored  and  need  not  be  sold  at  once  when  they  are 


68  See  James  E.  Boyle,  Speculation  and  the  Chicago  Board  of  Trade 
(1921),  pp.  97-113,  for  a  brief  history  of  the  controversy  between  the 
Board  of  Trade  and  terminal  elevator  companies  over  the  control  of 
public  elevator  service. 

"Paul  M.  Atkins  discusses  the  problems  involved  in  seasonal  demand 
and  the  means  used  in  meeting  them  in  an  article  "Solving  the  Problem 
of  Seasonal  Goods,"  in  Administration,  Vol.  II  (Oct.,  1921),  pp.  473- 
484. 


PHYSICAL  DISTRIBUTION  323 


produced.     Thp.  ppf-j^ffpp.f,,  fl^  of 


ijnjjorm  throughout  the  year.55     This, 


"filtewise,  causes  a  larger  proHucfion  and  consumption  of  sea- 
sonal goods,  for  consumers  are  given  a  longer  time  in 
which  to  consume,  and  out  of  season  prices  do  not  rise 
so  high  as  they  otherwise  would.  Producers  can  bring 
larger  supplies  on  the  market  because  they  do  not  need 
to  be  "dumped"  during  the  short  season  of  production. 
Since  the  surplus  can  be  held  over  for  later  sale,  prices 
are  higher  during  the  season  and  losses  from  dumping  can 
be  avoided.  Even  in  the  case  of  highly  perishable  com- 
modities, such  as  fruits  and  vegetables,  which  cannot  be 
stored  for  long,  the  possibility  of  carrying  them  in  storage 
for  a  few  days  or  hours  prevents  the  loss  from  immediate 
sale  on  a  glutted  market. 

Cold  Storage.  —  One  of  the  most  interesting  features  of  ware- 
housing is  the  cold  storage  business.  Just  as  certain  products 
require  refrigeration  in  order  to  be  transported  to  any  great 
distance,  so  they  must  be  held  in  cold  storage  if  they  are  to 
wait  long  for  consumption.  In  the  former  case,  as  in  the 
latter,  it  is  the  time  element  involved,  resulting  in  deteriora- 
tion in  quality,  that  necessitates  the  "cold."  Some  very  per- 
ishable products,  such  as  green  vegetables  and  such  fruits  as 
oranges,  peaches,  and  strawberries,  cannot  be  held  long  in 
storage.  With  these  the  main  use  of  cold  storage,  as  of  re- 
frigeration in  transit,  is  to  keep  them  in  condition  while 
en  route  to  market,  and  to  hold  them  over  for  a  day  or  more, 
or  for  only  a  few  hours,  until  they  are  consumed,  or  when 
the  market  is  too  slow  to  move  them,  for  a  few  days  at  most. 
But  in  the  case  of  other  products,  such  as  butter,  eggs,  poultry, 
and  meat,  the  storage  period  may  be  longer.  Thus,  eggs  which 
are  laid  in  abundance  during  the  early  summer  are  stored 
until  the  fall  and  early  winter  when  the  fresh  supply  is  scarce. 
In  this  way  prices  are  steadied  and  leveled  throughout  the 

55  See  Report  of  the  Industrial  Commission,  Vol.  VI  (1901),  pp.  192  ff. 


324  PRINCIPLES  OF  MARKETING 

year,56  and  surplus  production  is  encouraged  during  the  sea- 
son of  abundant  suppty.57 

00  G.  K.  Holmes,  Cold  Storage  and  Prices,  U.  S.  Department  of  Agri- 
culture, Bureau  of  Statistics,  Bulletin  101  (1913).  For  a  discussion 
of  the  various  aspects  of  cold  storage,  economic,  technical,  and  legal, 
L.  D.  H.  Weld,  The  Marketing  of  Farm  Products,  Chap.  VIII,  and  E.  G. 
Nourse,  The  Chicago  Produce  Market,  pp.  83-91,  are  both  valuable. 

"Canning  factories  sometimes  take  the  surplus  of  perishables  from 
the  market.  This  performs  approximately  the  same  service  as  do  cold 
storage  and  warehousing  for  less  perishable  commodities. 


CHAPTER  XVI 
MARKET  FINANCE 


The  problems  of  market  finance  have  to  do  with  supplying 
funds  with  which  to  meet  the  expenses  of  performing  the 
market  functions — particularly  to  carry  the  necessary  invest- 
ment in  stocks,  whether  purchased,  in  process,  or  produced, 
and  to  meet  the  costs  of  buying  and  selling.* 

Source  of  Funds. — The  funds  used  in  marketing  are  secured 
through  the  investments  of  the  parties  to  the  market,  through 
long  time  borrowing,  and  through  what  is  commonly  called 
"current  financing."  The  present  discussion  will  be  confined 
to  this  "current  financing,"  that  is,  to  financing  which  has 
as  its  purpose  the  supply  of  funds  with  which  to  provide  for 
the  current  expenses  involved  in  the  production,  purchase,  and 
sale  of  merchandise,  to  carry  stocks,  to  meet  the  expenses  of 
buying  and  selling,  and  particularly  to  meet  any  extraordinary 
or  "peak"  loads  which  find  their  origin  in  market  conditions. 
Many  of  these  needs  are  met  from  the  permanent  investment 
in  the  business  and  from  long  time  borrowing.  But  these  will 
not  be  discussed.1 

In  most  industries  there  are  certain  "peak"  seasons,  times 
at  which  current  funds  in  very  large  amounts  are  in  demand. 
And  there  are  often  other  seasons  in  which  little  money  is 
required  to  meet  current  market  expenses.  This  is  especially 

1  Discussions  of  these  factors  will  be  found  in  such  works  as  H.  G. 
Moulton,  The  Financial  Organization  of  Society  (1921),  W.  H.  Lough, 
Business  Finance  (1917),  and  A.  S.  Dewing,  The  Financial  Policy  of 
Corporations  (1920). 

325 


326  PRINCIPLES  OF  MARKETING 

true,  for  example,  with  farm  products  and  with  such  style 
goods  as  men's  and  women's  clothing.  The  peak  season  is 
found,  too,  in  the  automobile  and  construction  industries,  and, 
indeed,  in  greater  or  less  degree  in  all  industry.  Most  retail 
merchants  and  the  wholesalers  who  supply  them,  find  that 
more  funds  are  required  at  certain  seasons,  such  as  Christmas, 
spring,  and  fall,  than  at  others.  Furthermore,  even  though 
the  volume  of  business  may  not  vary  greatly,  changes  in 
prices  exercise  an  influence  upon  the  financial  needs  of  a 
business.  But  problems  of  current  finance  are  by  no  means 
confined  to  these  peak  seasons.  For  most  producing  and  mer- 
chandising houses  dependjnopn  short  timejcredit.  rather  than 
on  capital  investment  or  long  time  loans,  for  some  of  the 
supply  of  working  capital  with  which  to  meet  their  current 
expenses  for  producing,  purchasing,  and  selling.  Small  retail 
establishments  often  have  practically  no  working  capital  of 
their  own,  but  depend  upon  their  supply  houses  to  grant  them 
credit  until  they  can  pay  for  merchandise  from  the  proceeds 
of  its  sale.2  A  disadvantage  in  this  method  of  financing  is 
that  the  business  may  become  dependent  in  a  large  degree 
upon  those  who  extend  credit  to  it. 

Many  of  the  demands  for  funds  are  met  from  the  proceeds  of 
short  time  loans.  This  is  often  better  than  to  meet  them  all  with 
invested  funds.  For  that  policy  would  frequently  cause  a  firm 
to  have  idle  funds  which  at  best,  when  not  in  use  in  the  busi- 
ness, could  be  loaned  with  safety  only  at  low  rates  of  inter- 
est.3 It  is  evident  that  in  the  case  of  a  prosperous,  growing 
business,  with  good  credit,  it  would  be  unwise  to  meet  the 
peak  loads,  and  even  the  bulk  of  normal  current  expenses, 
from  invested  capital.  A  simple  example  will  illustrate  this. 
Suppose  a  retail  firm  has  $50,000  and  can  borrow  $200,000  at 
7  per  cent.  Assume  it  makes  12  per  cent  on  the  capital  em- 

2  On  the  calculation  of  requirements  for  working  capital,  see  W.  H. 
Lough,  op.  cit.,  Chap.  XVII. 

3  This  is  true  because  the  all  important  point  is  to  safeguard  the 
principal  so  that  it  may  be  obtained,  unimpaired,  whenever  it  is  needed. 


MARKET  FINANCE  327 

ployed,  i.  e.,  on  $250,000,  it  will  make  $30,000.  Subtract 
$14,000  from  this— the  7  per  cent  interest  on  the  $200,000 
loan — and  there  is  left  $16,000,  or  32  per  cent  profit  on  the 
$50,000  invested  by  the  firm.  Here  again,  however,  as  in 
the  case  of  the  firm  dependent  on  the  credit  granted  by  supply 
houses,  a  firm's  equity  in  its  business  is  small.  And  in  case 
of  difficulties  it  may  quickly  lose  control  to  the  bankers  from 
whom  it  has  borrowed. 

Causes  of  Seasonal  Needs. — The  problems  of  seasonal  fin- 
ance are  particularly  interesting  to  students  of  marketing 
because  they  are  due  largely  to  market  conditions.  These 
problems  arise  from  numerous  causes.  They  may  be  roughly 
summarized  by  stating  that  excess  funds  are  needed  with 
which  to  meet  the  expenses  of  a  business  during  the  period 
whichprececles  the  financial  return  from  the  sale  of  its  prod- 
uct.4  The  more  important  of  these  expenses  are:  (1)  to  carry 
proctuction,  selling,  and  stock  peaks  which  arise  out  of  sea>- 
sonal  markets~and  cause-iarge  expenditures  in  advance  of  re- 
ceipts from  sales ;  (2)  to  meet  variations  in  demand  from  other 
than  seasonal  causes,  such  as  exceptionally  high  (or  low) 
prices  for  products  bought  or  sold,  or  changes  in  the  physical 
volume  of  business;  or  (3)  to  carry  the  stock  during  a  period 
of  unusually  slow  returns  for  the  sales  efforts  put  forth.  These 
slow  returns  may  result  (a)  from  a  "slow  season"  in  which 
the  sale  of  the  firm's  goods  does  not  begin  as  soon  as  usual; 
(b)  from  "hard  times"  which  bring  a  general  falling  off  in  an- 
ticipated purchases,  or  (c)  from  uncertainty  concerning  prices, 
which  makes  buyers  hold  off.  They  may  also  arise  (d)  from 
defective  sales  efforts,  (e)  from  "frozen  credit"  (the  failure 
of  purchasers  to  pay  promptly),  or  (/)  from  extending  credit 
to  poor  risks. 

4  See  Morris  A.  Copeland,  "Seasonal  Problems  in  Financial  Admin- 
istration,"   The   Journal    of   Political   Economy,    Vol.    XXVIII    (Dec., 
1920),    pp.   793-826.    It   is   evident   that   not    all    problems    of    current 
nance  are  market  problems,  although  it  is  safe  to  suggest  that  they 
arise  largely  out  of  market  conditions. 


328  PRINCIPLES  OF  MARKETING 

For  the  going  concern,  the  actual  amount  of  current  funds 
needed  is  determined  primarily  by  market  conditions.  If 
the  market  is  not  seasonal,  this  amount  will  be  relatively  con- 
stant. For  after  the  product  begins  to  reach  the  market, 
there  will  be  a  steady  flow  of  products  out  of  the  factory  and 
a  flow  of  income  into  the  treasury.  This  will  offset  the  steady 
payments  for  materials,  supplies,  labor,  advertising,  and  other 
current  expenses.  Such  a  condition  with  income  balancing 
outgo  is,  however,  seldom  realized,  and  the  industries  are  few 
indeed  in  which  there  are  no  problems  of  seasonal  finance. 
Even  with  these  fortunate  industries  many  problems  of  cur- 
rent finance  a^rise.  For  general  business  conditions  affect 
the  volume  of  sales,  a  firm's  sales  may  slacken,  payments 
may  be  slowed  up  with  a  slowing  up  of  general  -business,  prices 
vary  from  time  to  time,  and  deliveries  of  raw  materials  are 
irregular.  These  and  many  other  considerations  make  it  im- 
possible for  business  to  depend  upon  current  income  always 
to  meet  current  outgo. 

Conditions  Determining  Current  Financial  Needs. — Cer- 
tain fundamental  elements  affect  the  current  funds  normally 
needed  in  a  business.  Variations  in  these  elements,  likewise, 
largely  cause  the  variations  from  the  normal  which  arise  from 
time  to  time,  as  they  are  also  responsible  for  varying  condi- 
tions in  different  lines  of  business.  Among  the  more  important 
of  those  which  influence  the  financing  of  distribution,  or  which 
arise  out  of  market  conditions  are: 

1.  The  volume^aLbusiness  done. 

2.  Unit  costs,  including  (a)  the  costs  of  production  and  of 
materials,  supplies,  and  finished  goods  and  (6)  the  unit 
cost  of  selling  and  buying,  and  of  performing  the  other 
market  functions. 

3.  The  length  of  time  the  goods  are  in  preparation  for  the 
market:  manufacture,  assorting  by  quality,  quantity,  etc., 
in  storage. 

4.  The  stock  of  finished  goods,  materials,  and  supplies  which 


MARKET  FINANCE  329 

must  be  kept  on  hand  in  excess  of  the  immediate  needs 
of  the  plant  or  store — to  accommodate  the  business  to 
fluctuations  in  demand  for  the  product  and  in  the  supply 
of  materials  and  supplies. 

5.  Variations  in  stocks  and  in  volume  of  business  which  arise 
out  of  seasonal  conditions  in  production  or  marketing. 

6.  The  accuracy  with  which  production,  or  purchases,  and 
sales  are  correlated.    This  normally  shows  itself  in  prac- 
tice in  the  correlation  between  purchase  and  payment  for 

the  goods  to  be  merchandised  and  the  sale  and  collection 
of  payment  therefor.  It  involves  the  correctness  with 
which  the  market  is  anticipated,  the  skill  with  which  the 
purchasing  is  done,  the  success  of  the  sales  campaign, 
and  the  effectiveness  with  which  collections  are  made. 

7.  (a)  The  terms  of  payment  for  sales  and  purchases,  such 
as  the  discounts  for  cash,  and  the  credit  terms  taken  and 
given.     (6)   Carload  freight  rates  and  discounts  offered 
for  quantity  purchases. 

8.  Variations  in  the  prices  of  the  goods  and  services  involved, 
an  element  affecting  the  unit  costs  mentioned  in  2. 

Discussion  of  These  Elements. — These  points  are  all  closely 
interrelated.  The  first  four  points^f-volume  of  business,  the 
cost  of  the  goods,  the  time  involved  in  preparation  for  the 
market,  and  the  stocks  which  must  be  carried — are  funda- 
mental in  determining  the  amounts  invested  in  stocks.  The 
other  points  are  fundamental  because  they  effect  variations 
in  the  volume  of  funds  needed  from  season  to  season,  and 
because  they  cause  variations  between  industries.  But  they 
are  likewise  supplementary  to  the  first  four  points,  since  varia- 
tions in  the  latter  affect  the  factors  mentioned  in  the  first 
four.  These  relations  can  be  briefly  suggested. 

(1)  and  (2).  Industries  in  which  raw  materials  are  expen- 
sive, as  well  as  those  which  involve  expensive  processing  to 
make  the  materials  ready  for  market,  require,  first,  the  invest- 
ment of  large  sums  in  raw  materials,  and,  second,  the  invest- 


330  PRINCIPLES  OF  MARKETING 

ment  of  large  sums  in  production,  in  goods  in  process, 
and  in  goods  ready  for  market.  Firms  which  have  a  large 
volume  of  business  must  likewise  provide  large  sums  for  in- 
vestment in  goods.  The  relative  quantities  required  in  differ- 
ent industries  and  in  different  firms  are  primarily  functions 
of  the  other  points  enumerated.  Variations  in  prices  and 
wages  (point  8)  affect  particularly  the  cost  of  goods  and  the 
expense  of  marketing. 

(3)  and  (4).  It  is  evident  that  if  goods  are  long  in  process 
(point  3)  the  investment  in  the  materials  being  processed  will 
be  large  in  relation  to  the  current  output.  In  some  indus- 
tries, as  in  the  manufacture  of  iron  and  steel  and  the  products 
made  therefrom — ships,  locomotives,  buildings,  bridges — goods 
are  in  process  or  in  storage  between  processes  for  months  and 
often  for  years,  before  they  are  in  the  form  in  which  final 
consumption  takes  place.  In  other  industries,  such  as  the  can- 
ning industry,  a  few  days  completes  the  processing.5  Again, 
if  large  stocks  of  production  goods  or  of  finished  stocks  must 
be  kept  on  hand  (point  4) ,  a  large  inventory  results,  and  so  a 
considerable  investment  in  stocks  is  necessary.  This  condi- 
tion arises  when  supplies  are  uncertain  and  irregular  in  ar- 
rival. It  is  usually  found  when  production  goods  come  from 
a  distance,  for,  in  order  that  a  constant  supply  may  be  as- 
sured, a  surplus  over  current  needs  must  be  kept  on  hand 
near  the  store  or  factory.6  Again,  if  the  plant  is  located  at 
a  distance  from  the  market  for  its  finished  product,  or  if  job- 
bers and  retailers  depend  upon  current  supplies  from  the  fac- 
tory and  do  not  order  in  large  quantities  in  advance  of 
sales,  large  inventories  of  finished  goods  must  be  kept  by  the 
manufacturer.  The  iron  and  steel  industry  and  the  clothing 
industry,  considering  the  time  materials  are  en  route  and  in 
process  from  mine  or  plantation  to  consumer,  serve  as  excel- 
lent examples  of  industries  in  which  large  stocks  of  materials 

B  Even  in  this  industry,  however,  growers  are  sometimes  financed  by 
the  canners  during  the  growing  season.-,    t 
"This  problem  was  discussed  in  Chap.  VI. 


MARKET  FINANCE  331 

must  be  on  hand.  Furthermore,  because  of  the  time  involved 
in  production,  large  stores  of  stocks  ready  for  market  or 
near  to  the  final  stages  of  production  must  be  kept  in  reserve 
to  meet  unforeseen  demands.  These  conditions  slow  up  the 
turnover  and  increase  the  necessary  working  capital  and  the 
cost  of  financing.  When  these  large  stocks  are  held  by 
merchants  the  burden  is  simply  shifted,  or  divided;  the  funda- 
mental situation  is  not  altered. 

(5).  If  sales  are  seasonal  and  production  involves  much 
time,  stocks  must  be  provided,  processed,  and  held  ready 
for  market  long  before  they  will  be  bought  by  final 
consumers;  or  if  production  is  seasonal,  stocks  must  be  held. 
These  conditions  can  be  illustrated  from  well  known  indus- 
tries. Since  the  production  of  cotton  and  wool  is  a  seasonal 
industry,  stocks  must  be  held  throughout  the  year  for  the 
use  of  the  textile  mills.  The  sale  of  clothing  is  also  sea- 
sonal, and,  consequently,  much  of  the  cloth  used  and  many  of 
the  clothes  made  must  be  produced  in  advance  of  the  seasons, 
if  there  is  to  be  a  sufficient  supply  of  cloth  for  the  clothing 
manufacturers  and  of  clothing  for  the  merchants.  The  sea- 
sonal production  of  lumber  and  the  seasonal  sale  of  auto- 
mobiles are  further  illustrations.  The  canning  of  salmon, 
fruit,  and  vegetables,  and  the  manufacture  of  sugar  illustrate 
industries  in  which  the  goocb  are  not  long  in  process,  but  in 
which  the  production  of  the  raw  material  is  seasonal.  Since 
the  materials  are  perishable,  these  are  held  as  finished  prod- 
ucts, rather  than  as  raw  materials,  and  are  stored  by  manu- 
facturers, wholesalers,  or  retailers.  In  the  case  of  grain,  the 
materials  are  held,  and  milling  is  carried  on  more  or  less  uni- 
formly throughout  the  year. 

(6).  Closely  related  to  the  problem  of  seasonal  markets  is 
the  skill  with  which  production  and  purchases  are  correlated 
with  sales.  This  involves  the  accuracy  with  which  the 
market  demand  is  anticipated  and  the  effectiveness  with 
which  the  goods  are  sold,  as  well  as  the  effectiveness  with 
which  collections  are  made.  In  case  of  excess  production,  or 


332  PRINCIPLES  OF  MARKETING 

excess  purchases  of  merchandise  to  be  sold,  it  may  be  neces- 
sary to  hold  goods  longer  than  the  normal  period  in  order 
to  avoid  dumping  them  on  the  market  at  a  loss.  Or  a  normal 
supply  of  goods  may  not  be  sold  as  rapidly  as  anticipated, 
or  payments  may  be  "slow."  This  may  be  due  to  a  "slow 
season"  in  which  buyers  fail  to  come  into  the  market  as  early 
as  was  anticipated,  or  it  may  be  due  to  the  failure  of  the 
sales  organization  to  attract  buyers  in  sufficient  numbers. 
In  the  former  case  the  problem  of  carrying  surplus  stocks 
arises;  in  the  latter,  there  may  be  the  additional  problem  of 
procuring  further  funds  with  which  to  improve  or  intensify 
the  sales  campaign. 

(7).  The  terms  of  purchase  and  sale  (point  7a)  affect  the 
need  for  working  capital  to  invest  in  materials,  supplies,  and 
the^rmal  product'  When  the  manufacturer  must  pay  cash 
for  materials  and  supplies,  perhaps  even  finance  the  produc- 
tion of  them,  and  when  he  gives  credit  to  those  who  purchase 
the  final  product,  he  must  supply  funds  with  which  to  carry 
the  stock  of  materials  and  supplies  on  the  one  hand  and  the 
finished  product  on  the  other,  as  well  as  the  other  expenses  of 
marketing.  At  the  other  extreme  is  the  manufacturer  who  is 
given  credit  for  his  supplies  and  has  his  working  capital  ad- 
vanced by  purchasers.  In  his  case  direct  financing  is  at  a 
minimum.  Again,  the  length  of  time  for  which  credit  is  ex- 
tended to  customers  and  the  time  creditors  extend  affect  the 
volume  of  current  financing.  It  may  be  further  influenced 
by  the  extent  to  which  cash  discounts  are  offered  and 
taken.7 

Carload  freight  rates  and  discounts  offered  for  large  pur- 
chases (point  7b)  affect  the  volume  of  goods  purchased  at 
any  one  time,  and,  hence,  the  amount  of  funds  needed.  A 
large  difference  in  freight  costs  between  carload  shipments 
and  smaller  shipments,  or  a  large  difference  in  price  between 
large  and  small  orders,  frequently  makes  it  worth  while  to 

7  See  pp.  342-345 


MARKET  FINANCE  333 

order  in  larger  volume  than  current  needs  would  otherwise 
necessitate.  Larger  amounts  are  thereby  invested  in  stocks.8 

(8).  Finally,  variations  in  price  may  have  an  important 
effect  on  the  amount  of  funds  needed.  The  large  price  in- 
creases of  the  recent  war  period  increased  the  value  of  stocks 
in  inventories,  sometimes  by  more  than  100  per  cent.  Simi- 
larly, low  prices  decrease  the  funds  needed  to  carry  on  the 
regular  volume  of  business.  Tn  times  of  abnormally  high 
pnces  the  requirements  of  Business  for  current  capital  are,  con- 
sjjquently,  greatly  increased.  This  is  true  even  when  there 
is  no  increase  in  the  physical  volume  of  trade.  It  is 
in  such  times  that  a  great  strain  is  placed  upon  the  credit 
structure. 

Middlemen  and  Finance:  Division  of  the  Burden. — 
Dealers,  i.  e.,  merchants  and  functional  middlemen  of  ex- 
change, are  likewise  affected  by  the  conditions  which  have 
been  discussed.  But  they  do  not  have  to  finance  goods  in 
process  of  production.  This  is  tr^ie,  unless,  as  is  sometimes 
the  case,  they  help  to  finance  the  producer  by  allowing  him 
to  postpone  payment  for  goods  which  they  sell  to  him,  or  by 
the  advancement  of  funds  to  producers  or  dealers  whose  goods 
they  purchase. 

"It  is  not  an  uncommon  practice  for  them  [wool  merchants]  to 
advance  to  the  growers  of  the  west,  or  to  the  small  merchants  of 
the  east,  substantial  sums  of  money  on  consigned  wool,  or  even 

8  It  is  evident  that  these  elements  simply  determine  how  the  burden 
of  carrying  goods  shall  be  divided  among  those  who  handle  them.  It 
would  be  incorrect,  however,  to  say  that  this  division  will  not  affect 
the  total  stock  held  in  an  industry.  For  the  further  along  the  line 
of  distribution  the  burden  of  carrying  goods  is  forced,  the  larger  is  the 
total  inventory  which  is  likely  to  be  necessary.  The  stock  is  less  fluid 
under  these  conditions  than  when  it  is  more  centrally  located.  When 
quantity  prices  for  goods  and  transportation  are  offered,  it  may  be 
uneconomical,  nevertheless,  to  order  small  lots,  and  so  each  buyer  tends 
to  keep  a  larger  stock  on  hand  than  his  business  would  otherwise 
warrant. 


334  PRINCIPLES  OF  MARKETING 

on  prospective  clips,  and  it  is  sometimes  necessary  for  the  mer- 
chant to  carry  his  manufacturer  customer  for  months  or  even,  in 
some  cases,  until  he  can  realize  on  his  manufactured  product."  8 

In  most  industries  the  burden  of  financing  and  the  accom- 
panying risks  are  4iv^^<1  flinong  the  parties  to  a  transac- 
tion.10  The  investment  of  funds  in  commodities  brings  with 
it  the  necessity  of  bearing  market  risks  and  the  risks  of 
physical  deterioration.  During  a  very  large  part  of  the  jour- 
ney of  products  from  producer  to  final  consumer  this  burden 
rests  upon  the  middleman.  In  some  cases,  as  in  the  canned 
fruit  and  vegetable  market,  the  middleman  is  the  predominat- 
ing figure.  In  others,  as  in  the  sugar  trade,  the  manufacturer 
predominates.  The  extent  to  which  the  burden  is  shifted  de- 
pends in  a  large  measure  upon  the  financial  strength  of  the 
parties  to  the  exchange.  When  both  parties  are  financially 
strong,  business  will  probably  be  done  on  a  cash  or  short  time 
credit  basis.  But  if  a  middleman  or  manufacturer  is  forced 
to  give  credit  to  his  customers,  even  though  he  is  strong 
financially,  he  is  likely  to  endeavor  to  obtain  credit  from  his 
sources  of  supply.  When  one  party  is  financially  weak  and 
the  other  strong,  it  is  the  stronger  which  is  likely  to  bear  the 
burden  of  financing.  Thus  in  the  cotton  grey  goods  trade 
many  mills  in  the  East  buy  raw  cotton  outright  with  their 
own  or  borrowed  funds.  Weaker  mills  may  also  stock  cotton 
in  advance,  but  they  are  likely  to  require  an  advance  of 
funds,  or  to  have  their  own  weaker  credit  supplemented  by 
the  selling  houses  which  handle  their  finished  products.  The 
evolution  in  the  sale  of  harvesting  machinery  is  also  a  case 
in  point.  The  International  Harvester  Company  formerly 
allowed  considerable  time,  usually  three  years,  for  payment. 
But  the  increasing  financial  strength  of  the  farmer  was  taken 
advantage  of  in  1919  and  cash  payments  became  temporarily 
the  rule. 

9  P.  T.  Cherington,  The  Wool  Industry  (1916),  p.  64. 

10  The  risks  involved  in  marketing  are  discussed  in  Chap.  XVII. 


MARKET  FINANCE  335 

The  division  of  the  finance  and  risk  burdens  is  also  de- 
pendent in  a  measure  on  the  cugtnm  of  the  trade.  Competitive 
conditions,  likewise,  play  a  part.  For  example,  when  there 
is  a  tendency  to  overproduction  in  an  industry  the  burden 
of  financing  is  likely  to  be  shifted  to  the  producer,  since  the 
granting  of  credit  may  be  used  as  a  selling  argument  and 
the  demand  is  not  great  enough  to  force  the  financing  upon 
the  buyer.  On  the  other  hand,  when  demand  is  great,  an  op- 
portunity arises  for  the  seller  to  shift  the  burden  of  carrying 
stocks  upon  the  buyer.  This  occurred  through  the  shortening 
of  credits  during  the  period  of  the  World  War. 

Stock-Turn  and  Finance. — It  is  a  principle  of  sound  mer- 
chandising that  the  investment  in  stock  shall  bp  as  small  ^s 
is  consistent  with  the  needs  of  the  business.  The  stock  of  raw 
materials  and  supplies  which  the  manufacturing  plant  has  on 
hand  or  en  route  to  its  factory  should  be  no  larger  than  the 
immediate  needs  of  the  plant  demand,  and  its  supply  of  fin- 
ished products  should  not  be  in  excess  of  the  immediate  needs 
of  its  market.  The  stock  of  the  merchant  should  be  no  larger 
than  service  to  his  customers  necessitates.  The  ideal  would 
be  for  the  raw  materials  to  flow  into  the  factory  in  just  suf- 
ficient quantities  to  meet  the  needs  of  processing,  and  for 
processing  to  proceed  so  as  to  turn  out  finished  goods  in  ex- 
actly the  quantities  immediately  demanded  in  the  market. 
With  the  merchant,  the  ideal  would  be  for  goods  to  come  into 
the  storehouse  just  in  time  to  be  put  into  proper  condition  for 
immediate  sale.  This  ideal  is,  however,  impossible  of  achieve- 
ment. The  variable  factors  which  make  it  impossible  have 
been  described.  But  even  though  the  ideal  cannot  be  fully 
realized,  good  merchandising  seeks  to  approximate  it,  for,  in 
the  words  of  the  trade,  a  rapid  "turnover"  or  "stock-turn" 
is  an  essential  to  successful  merchandising.11 

"Retail  stock-turn  was  discussed  on  pp.  201-205.  In  a  factory  the 
rapidity  of  the  stock-turn  is  determined  by  the  rate  of  turnover  of 
finished  goods  and  raw  materials,  and  by  the  time  the  goods  are  in 

process. 


336  PRINCIPLES  OF  MARKETING 

II 

Source  of  Funds  and  Means  of  Extending  Credit. — Work-  ' 
ing  capital  with  which  to  meet  the  needs  previously  outlined 
may  be  supplied  in  the  following  ways: 

1.  By  using  invested  capital — funds  of  the  firm  or  funds 
borrowed  on  a  long  time  basis. 

»  2.  By  postponing  payment,  and  thereby  shifting  the  bur- 
den upon  the  seller — through  the  open  book  account,  promis- 
sory note,  or  draft  drawn  by  the  seller  on  the  buyer  or  his 
bank. 

3.  By  borrowing  funds  on  a  short  time  basis — usually  from 
banks,  either  directly  or  through  brokers. 

The  second  and  third  methods  are  of  primary  interest  to 
students  of  marketing. 

Postponing  Payment:  Types  of  Credit. — All  the  methods 
of  short  time  financing,  except  the  use  of  a  firm's  own  funds, 
involve  the  use  of  credit.  Whether  funds  are  borrowed  in 
order  to  pay  "cash"  on  purchase  or  soon  thereafter,  or  whether 
the  payment  of  cash  is  postponed  by  the  buyer,  the  basis  of 
the  transaction  is  credit,  personal  or  mercantile.  In  either 
case  the  goods  must  be  "carried,"  that  is,  someone  has  to  have 
funds  tied  up  in  them.12  As  a  rule,  it  is  the  commercial  bank 
which  carries  the  short  time  debts  which  are  created  in  carry- 
ing on  the  market  processes. 

12  In  the  discussion  which  follows  no  effort  will  be  made  to  keep  sepa- 
rate the  consideration  of  funds  borrowed  to  carry  on  the  sales  and 
buying  efforts  of  a  firm  and  those  invested  in  stock.  It  is  evident  that 
if  goods  are  sold  at  a  profit  the  sales  expenses  must  be  covered  in  the 
selling  price,  and  consequently,  to  the  next  buyer  become  a  part  of  the 
cost  of  the  goods.  Likewise,  in  the  market  as  a  whole,  they  must  be 
considered  as  a  part  of  the  cost  of  the  goods.  It  is  true  that  to  the 
firm  which  has  the  expense  for  its  selling  organization  therejs  nothing 
immediately  tangible  to  utilize  as  collateral  for  a  loan,  but  a  large  part 
of  borrowing  by  such  organizations  is,  in  any  case,  in  the  form  of 
unsecured  loans  made  upon  the  belief  in  the  intention  and  ability  of 
the  borrower  to  make  good,  rather  than  on  immediate  tangible  col- 
lateral. 


MARKET  FINANCE  337 

There  are  essential  differences  between  mercantile  credit 
and  personal  credit.13  Mercantile  credit  is  granted  by  one 
business  house  to  another;  personal  credit  is  granted  by  a 
business  house_tp_an  individual  The  latter,  as  a  rule,  enables 
individuals  tobuy  goods  to  consume.  It  does  not  assist  di- 
rectly in  carrying  on  the  processes  of  industry,  but  permits 
the  individual  to  anticipate  his  future  income  in  order  to  pro- 
vide for  immediate  needs.  It  does  not  rest  on  the  assumption 
thai  the  goods  will  be  sold  for  profit  by  the  debtor. 

•  "Commercial  or  mercantile  credit,  however,  has  production  in 
mind.  It  'carries'  a  business  transaction.  It  fills  the  void  between 
purchase  and  sale.  It  gives  the  buyer  time  to  turn  the  goods  into 
money  before  he  pays  for  them.  It  gives  the  manufacturer  time 
to  turn  raw  material  into  finished  products  before  payment  is  due. 
It  provides  working  capital.  It  is  productive  credit,  and  the 
whole  process  of  production,  transportation  and  distribution  is 
based  upon  it."  1 

In  some  degree  commercial  credit  depends  ultimately  upon 
personal  credit.  This  is  true,  even  though  the  immediate  loan 
may  be  based  upon  mercantile  credit,  and  perhaps  upon  actual 
merchandise  pledged  as  security,  because  all  production  is  in 
the  end  carried  on  to  prepare  goods  for  personal  consumption. 
It  is  only  on  the  assumption  that  the  goods,  or  in  the  case  of 
machinery  and  supplies,  the  goods  which  they  help  to  make, 
can  be  sold  for  final  consumption,  that  all  business  is  carried 
on,  and  that  mercantile  credit  can  be  arranged.  And  inas- 
much as  many  goods  for  personal  consumption  are  sold  on 
credit  it  is  evident  that,  to  the  extent  that  this  is  true,  the 
whole  credit  structure  re$t.s  ultimately  upon  personal  creditJJ 
For  if  the  retailer  does  not  carefully  investigate  his  risks  and 

"James  E.  Hagerty,  Mercantile  Credit  (1913),  Chaps.  III-V;  W.  H. 
Kniffin,  The  Practical  Work  of  a  Bank  (2d  ed.,  1916),  pp.  387-402. 

14  W.  H.  Kniffin,  op.  ciL,  p.  395. 

15  The  reasons  for  the  growth  of  personal  credit  as  outlined  by  Kniffin 
are  as  follows:   (1)  the  desire  of  sellers  to  extend  business,  (2)  the  fear 
of  offending  customers  by  refusing  credit,  and  (3)  the  " all-too-prevalent 
tendency  to  live  beyond  one's  means." — Ibid.,  p.  396. 


338  PRINCIPLES  OF  MARKETING 

gives  credit  to  customers  who  do  not  pay,  he  cannot  pay  the 
jobber  or  the  manufacturer  or  his  bank,  and  these  in  turn 
may  not  be  able  to  meet  their  obligations.  In  the  first  in- 
stance, the  credit  structure  rests  on  the  assumption  that  goods 
will  be  bought  for  final  consumption.  If  this  does  not  follow  — 
if  there  is  a  buyers'  "strike,"  or  if  particular  goods  fail  to 
move  —  the  whole  credit  structure  suffers.  But,  furthermore, 
if  the  goods  even  when  sold  for  final  consumption  are  not  paid 
for,  there  is  the  same  result.  It  is  to  avoid  this  last  possi- 
bility, as  well  as  the  cost  and  work  involved  in  credit  sales, 
that  so  many  retailers,  especially  in  the  staple  lines,  have 
adopted  the  cash  system  of  selling.  Goods  must  be  carried 
even  though  sold  for  cash,  but  the  period  is  not  so  long,  and 
the  risk  arising  out  of  the  possibility  that  goods  when  sold 
will  not  be  paid  for,  so  far  as  the  retailer  is  concerned,  is 
removed. 

The  Credit  Period.  —  The  credit  period  tends  to  conform  to 
the  times  at  which  the  debtor  expects  to  receive  the  funds  with 
which  to  pay.  Credit  for  personal  consumption  tends  to  con- 
form to  the  times  at  which  the  personal  income  is  received. 
For  example,  credit  to  wajp-fiflnwrF  is  frequently  extended 


for  a  period  of  one^  or^two  weeks.  Those  working  on  a 
salary  are  usually  paid  on  a  monthly  basis,  and  from  them 
monthly  payments  are  expected.  In  the  country,  payments 
were  formerly  expected  after  the  crops  were  sold.  In  more 
recent  years  the  growing  affluence  of  American  farmers  and 
their  growing  use  of  bank  credit  has  tended  toward  shortening 
the  credit  period.  In  case  the  purchase  involves  a  large 
amount,  as  in  the  purchase  of  furniture,  a  piano  or  an  auto- 
mobile, the  period  may  be  longer  but  periodic  payments  cor- 
responding to  the  receipt  of  the  income  are  usually  expected.16 
The  time  involved  in  mercantile  credit  tends^toconfprm 
to_that  during  which  goods  are  in  process  and  onthe  market 

"This  is  done,  for  example,  with  the  "dollar-down,  dollar-a-week" 
plans,  and  in  the  monthly  payment  plans  for  buying  automobiles,  pianos, 
phonographs,  furniture,  and  books. 


MARKET  FINANCE  339 

before  they  are  sold.  In  the  case  of  goods  which  are  to  be  sold 
for  cash,  this  turnover  period  will  include,  for  raw  materials, 
the  time  involved  in  production  in  addition  to  the  time  neces- 
sary for  their  sale.  With  raw  materials  or  finished  products 
to  be  merchandised  only,  it  will  cover  the  time  involved  in 
selling  the  stock.  In  the  case  of  goods  sold  on  credit  the 
period  must  be  extended  to  include  the  time  needed  for  col- 
lection, unless  the  sale  can  be  made  to  finance  itself,  through 
the  discounting  of  the  promissory  notes  of  the  buyer  or 
drafts  drawn  upon  him.17  In  this  case  the  goods  themselves 
may  serve  as  collateral.  This  conformation  of  the  time  of 
loans  to  the  receipt  of  income  from  individual  sales  is,  how- 
ever, but  rough.  Sellers  and  buyers  often  borrow  from  the 
banks  in  amounts  and  for  times  to  cover  a  period  or  a  season's 
purchases  and  sales,18  and  these  loans  are  frequently  renewed 
from  time  to  time. 

The  Security  for  Credit. — The  security  behind  a  credit 
transaction  varies  j££ally.  There  are,  however,  two  general 
classe&.of  credit  transaction — securecj.  and  unsecured.  By  this 
it  is  meant  that  there  may  be  a  pledge  of  specific  collateral 
to  protect  the  creditor,  or  that  the  transaction  may  rest  merely 
upon  the  reputation  and  general  assets  of  the  debtor.19 

The  personal  credit  of  retail  business  is  usually  unsecured: 
Neither  notes  nor  drafts  are  often  used.  The  common  book 
account  prevails.  As  goods  are  sold  a  charge  is  made  "on 
the^book"  to  'the  account  of  the  debtor.  Goods  for  personal 
use  are  generally  sold  in  small  quantities  at  frequent  intervals. 
The  effort  to  secure  the  loan  by  any  of  the  methods  used  in 
mercantile  transactions  would  involve  an  amount  of  detail 
and  trouble  out  of  proportion  to  the  value  of  the  transac- 

"  Even  in  this  case  the  credit  of  the  seller  is  the  fundamental  factor, 
see  p,  341. 

"This  point  will  be  discussed  later;  see  pp.  342-346. 

19  An  endorsement  of  the  paper,  note,  or  draft  by  a  second  party  may 
add  to  the  certainty  of  payment  but  such  paper  is  considered  unsecured. 
See  Langston  and  Whitney,  Banking  Practice  (1921),  p.  286. 


340  PRINCIPLES  OF  MARKETING 

tion.  As  a  result,  personal  credit  is  generally  based  solely  on 
an  estimate  of  the  character  and  the  capacity  of  the  individual 
to  pay.  Dependence  is  placed  on  the  fact  that  if  reasonable 
care  is  used  in  extending  credit,  most  bills  will  be  met.  A 
large  percentage,  furthermore,  of  those  who  receive  credit 
have,  other  than  the  goods  which  are  purchased,  no  tangible 
assets  to  pledge.  And  inasmuch  as  the  goods  are  withdrawn 
from  trade,  and  are  usually  consumed  immediately  after  pur- 
chase, they  cannot  be  used  as  collateral. 

Personal  credit  is,  however,  sometimes  secured  by  the  goods 
which  are  sold.  This  may  be  done  through  a  conditional 
sale,  the  seller  keeping  title  to  the  goods  until  they  are  finally 
paid  for.  It  may  also  be  done  by  covering  the  goods  with 
a  chattel  mortgage.  The  credit  extended  on  goods  sold  un- 
der a  partial  payment  plan  is  usually  secured  in  one  of  these 
ways.  '  Many  installment  houses  do  a  thriving  business  on 
such  a  basis,  taking  a  certain  amount  on  delivery  of  the  goods 
and  requiring  periodical  payments  thereafter,  until  the  goods 
are  paid  for.  Automobiles,  pianos,  phonographs,  and  house- 
hold goods  are  frequently  sold  in  this  way.  Machinery,  auto- 
mobile trucks,  harvesting  machinery,  cash  registers,  and  other 
products  sold  to  manufacturers,  farmers,  and  merchants  are 
other  examples.20 

Mercantile  credit,  likewise,  may  be  secured  or  unsecured. 
The  tinsecurecP"book  account,"  common  to  retail  trade,  is 
likewise  the  most  common  method  of  granting  mercantile 
credit.21  But  a  large  percentage  of  credit  sales  are  evi- 
denced by  promissory  notes  or  accerjteoLjJrafts.  The  note  is 
given  by  the  buyer  to  the  seller  and  the  draft  is  drawn  on 
the  buyer  or  his  bank,  and  accepted  by  them.  Either  may  be 
held  until  due  or  it  may  be  endorsed  and  discounted  at 
the  seller's  bank.  Finally,  these  notes  and  drafts  may  be  se- 
cured by  title  to  the  goods  involved  in  the  transaction,  through 

20  Most  of  this  latter  group  should  be  classified  as  credit  for  invest- 
ment in  permanent  equipment. 

21  For  the  reasons  for  this,  see  pp.  346-347. 


MARKET  FINANCE  341 

the  medium  of  a  bill  of  lading,  warehouse  receipt,  trust  re- 
ceipt, or  similar  document,  or  by  depositing  other  collateral  — 
as  stocks  and  bonds. 

The  Seller  and  the  Bank.  —  The  most  common  way  for  the 
Seller  to  carry  the  credits  he  'grants  is,  t,oa  borrow  of  banks 
ie  made.     This  may  be  done  by  means   of 


a  direct  loan^from  the  bank,  or  through  the  sale  of  the  seller's 
own  notes  in  the  "commercial  paper"  market.  These  loans 
are  usually  unsecured.  TlTeToans*  of  those  who  sell  on  open 
account  obviously  cannot  be  secured  by  the  goods  them- 
selves.22 The  seller  cannot  use  the  goods,  if  sold  outright,  as 
a  basis  for  collateral.  But  he  may  take  a  note  from  the 
buyer,  or  he  may  keep  title  to  the  goods  through  a  bill  of 
lading,  warehouse  receipt,  trust  receipt,  or  similar  document. 
These  can  be  endorsed  to  the  bank  together  with  discounted 
drafts  drawn  on  the  buyer.  This  method  is  largely  used  in  the 
sale  of  cotton,  wheat,  and  other  grains.  Outside  collateral, 
such  as  stocks  and  bonds,  can  also  be  used.  But  these  in- 
volve the  investment  of  the  seller's  own  funds  which  he  would 
normally  put  into  his  business.  Since  it  is  to  avoid  the  neces- 
sity of  keeping  his  own  money  tied  up  in  the  stock  as  well 
as  because  of  the  lack  of  funds  that  the  seller  goes  to  his 
bank,  this  method  is  not  frequently  used. 

The  unsecured  note  of  a  seller,  provided  he  has  a  reputation 
for  character  and  ability,  and  provided  his  business  is  in  a 
satisfactory  state,  is  commonly  considered  sufficient.  This  is 
particularly  true  in  so  far  as  the  loan  is  made  to  cover  cur- 
rent sales.  Such  loans  are  self-liquidating.  That  is,  an  actual 
sale  of  goods  has  been  made,  and  the  normal  expectation  is 
that  the  bill  will  be  paid.  If  the  borrower  has  a  good  credit 
standing,  collateral  is  unnecessary.  Should  notes  or  drafts  be 

22  In  recent  years  there  has  developed  the  practice  of  advancing  money 
against  open  accounts.  This  practice  has  been  largely  frowned  upon 
by  commercial  banks,  and  special  finance  and  discount  houses  now 
specialize  in  this  work.  See  W.  H.  Lough,  Business  Finance  (1917), 
pp.  406-410. 


342  PRINCIPLES  OF  MARKETING 

used  in  paying  the  seller,  they  may  be  held  by  him,  discounted 
at  the  bank,  or  used  as  collateral.  But  in  either  case,  the  loan 
is  made  primarily  because  of  the  bank's  belief  that  it  can 
collect  from  the  seller.  It  is  his  credit  which  is  primarily 
considered. 

Borrowing  Funds  on  a  Short  Time  Basis. — It  has  been 
shown  that  the  buyer  may  pay  out  his  own  funds  in  buying 
goods;  that  he  may  borrow  money  with  which  to  pay;  that 
he  may  be  extended  credit  by  the  seller;  and  that  the  seller 
may  endorse  and  negotiate  the  buyer's  paper,  or  use  it  as 
collateral  for  his  own  loans,  or  even  hypothecate  his  receiv- 
ables. It  has  become  increasingly  the  practice,  when  the 
buyer  is  unable  to  pay  for  goods  at  once  out  of  his  own  funds, 
for  him,  nevertheless,  to  make  immediate  payment.  To  do  so 
he  must  borrow  the  funds.  Again,  even  though  he  may  be 
given  time  in  which  to  pay  the  seller,  it  may  still  be  neces- 
sary for  him  to  borrow  to  make  the  payments  when  they 
are  finally  due. 

Why  is  it  that  a  buyer  will  borrow  money  with  which  to 
pay  cash,  rather  than  be  carried  on  the  books  of  the  seller? 
Two  reasons  present  themselves.  The  first,  and  generally  the 
more  important,  is  his  desire  to  benefit  by  the  cash  discount. 
The  second,  is  his  wish  to  avoid 
supply  house. 

The  Cash  Discount. — The  cash  discount  is  a  discount  from 
the  invoiced  bill  which  is  made  for  immediate  payment,  that 
is,  for  payment  on  receipt  of  the  bill  or  the  goods,  or  within 
a  short  period  thereafter.  Thus,  in  some  industries,  sales  to 
dealers  are  made  on  the  terms,  "2  per  cent  ten  days,  net 
thirty."  This  means  that  if  the  bill  is  paid  within  ten  days 
after  its  receipt  a  deduction  of  2  per  cent  from  the  face  of  the 
bill  is  allowed,  and  that  in  any  case  the  bill  becomes  due  at 
the  expiration  of  thirty  days.  If  the  buyer  has  funds  of  his 
own,  or  can  borrow  at  the  market  rate,  say  at  5  to  7  per  cent, 
and  pay  this  bill,  it  will  be  to  his  advantage  to  do  so.  Fur- 


MARKET  FINANCE  343 

thermore,  the  bill  is  due  in  any  case  in  thirty  days.  So  the  only 
additional  financing  required  is  to  procure  funds  for  the 
twenty  days  intervening  between  the  tenth  and  the  thirtieth 
days.  Money  can  be  borrowed  at,  say  6  per  cent.  The  cash 
payment  of  a  bill  for  a  thousand  dollars  will  result  in  a  saving 
of  $20  from  the  face  of  the  bill.  The  $980  borrowed  will  cost, 
at  6  per  cent  for  the  period  of  twenty  days,  only  $3.27.  But 
if  the  bill  is  not  paid  within  ten  days,  the  buyer  will  be  pay- 
ing $20  for  the  use  of  $980  for  twenty  days.  This  is  at  the 
rate  of  $365  per  year,  or  37.24  per  cent  per  annum. 

Historical  considerations  and  customs  resulting  therefrom 
seem  to  explain  the  very  high  cash  discounts  offered.23  Before 
the  Civil  War  it  was  customary  for  dealers  to  make  trips 
to  market  at  infrequent  intervals,  purchase  goods,  and  pay  for 
them  on  their  next  trip,  usually  at  the  end  of  six  months. 
They  gave  their  notes  in  the  meantime.  But  with  the  unset- 
tled conditions  following  the  outbreak  of  the  war,  and  par- 
ticularly the  unsettled  times  of  the  "greenback"  period  which 
followed,  the  creditor  was  fearful  lest  his  customer  could  not 
pay,  and  uncertain  as  to  the  actual  amount  of  money  he  might 
get  when  outstanding  bills  receivable  were  paid.  It  became 
customary,  therefore,  to  offer  "terms,"  with  a  high  discount 
from  the  face  of  the  bill  for  early  payment.2*  These  dis- 
counts continue  to-day,  partly  from  custom  and  partly  as  a 
collection  device.  Since  they  are  intended  to  be  taken,  the 
seller  discounts  the  proffered  discount  in  pricing.  That  is,  in 

23  For  cash  payment,  a  discount  of  5  per  cent  is  not  uncommon.    In 
the  sale  of  common  brick,  for  example,  the  terms  are  "5  per  cent  ten 
days,  net   30  days."     The   customary  terms   offered   in  all   important 
industries  are  shown  in  a  series  of  eight  articles  entitled  "Terms  of  Sale 
in  the  Principal  Industries"  beginning  in  the  December,  1919,  issue  of 
the  Federal  Reserve  Bulletin  and  extending  through  the   November, 
1921,  issue. 

24  See  W.  H.  Kniffin,  The  Practical  Work  of  a  Bank,  pp.  464-466;  see 
also  Bureau  of  Foreign  and  Domestic  Commerce,  Miscellaneous  Series 
No.  34,  The  Men's  Factory-Made  Clothing  Industry  (1916),  pp.  246-251. 


344  PRINCIPLES  OF  MARKETING 

the  case  above,  the  seller  undoubtedly  considers  his  true  price 
as  $980.  And  the  buyer  who  pays  $1,000  is  at  a  very  great 
disadvantage  in  competition. 

This  practice  makes  the  buyer  a  frequent  borrower  at  the 
commercial  bank.  To-day,  instead  of  making  a  note  payable 
to  the  seller,  who  thereby  bears  the  burden  of  financing  the 
transaction,  the  buyer  commonly  makes  out  a  note  to  his 
bank,  or  sells  his  "paper"  in  the  market.  In  this  way  he 
obtains  funds  with  which  to  pay  "cash"  to  the  seller.  Single 
name  paper  sold  to  banks  by  purchasers  has  thus  taken  the 
place  of  the  buyer's  note  to  the  seller  which,  after  endorse- 
ment, the  latter  formerly  discounted  at  his  bank,  or  held  until 
maturity.  In  some  businesses,  such  as  the  lumber  industry 
and  the  agricultural  machinery  trade,  the  older  method,  how- 
ever, continues  to  be  used.  But  in  industries  in  which  the 
buyer  pays  one  price  for  cash  and  another  after  thirty  or  sixty 
days  it  is  not  convenient  to  use  a  note,  for  the  principal  sum 
cannot  be  known  in  advance.25 

Cash  Payment  for  Independence  of  Supply  Houses. — 
There  is  a  second  reason  for  the  tendency  for  the  buyer  to 
borrj3w_fuflo!sjith  which  to  pay  "cash/.'  When  a  buyer  is 
carried  on  the  books  of  his  supply  house,  or  his  paper  is  en- 
dorsed by  them,  or  he  is  otherwise  financed  through  their 
offices,  a  more  or  less  definite  obligation  is  thereby  established. 
As  a  result  of  such  an  obligation  he  may  be  forced  to  con- 
tinue to  do  business  with  his  creditor,  even  though  it  may 
not  always  be  to  his  best  interest.  In  fact,  such  credit  is 
sometimes  extended  with  a  distinct  understanding  that  the 
debtor  is  to  give  his  business  to  his  creditor.26  The  buyer 
is  thereby  put  at  a  disadvantage  in  his  buying  against  com- 
petitors who  are  not  thus  tied  to  a  single  supply  house.  The 
same  difficulty  does  not  arise  when  money  is  procured  in  the 

K  For  further  reasons,  see  pp.  346-347. 

28  When  commission  houses  in  the  grain  trade  agree  to  finance  country 
shippers  there  is  usually  an  agreement  that  all,  or  a  certain  part,  of 
the  shippers'  grain  shall  be  consigned  to  the  commission  man. 


MARKET  FINANCE  345 

market.  If  the  firm's  paper  can  be  sold  in  the  open  market 
the  creditors  can  be  paid.  Consequently,  they  exercise  no  in- 
fluence over  the  debtor's  business,  because  of  his  financial 
obligations  to  them.27 

The  Buyer  and  the  Bank. — When  the  buyer  prefers,  or  is 
required,  to  pay  for  his  goods  on  delivery  or  soon  thereafter, 
the  burden  of  financing  is  his.  Well  known  houses  can  usually 
finance  such  transactions  through  borrowing  on  their  unse- 
cured paper.  But  some  form  of  collateral  security,  particu- 
larly bills  of  lading  and  warehouse  receipts,  is  sometimes 
required.  This  is  not  necessarily  because  the  bank  considers 
the  loan  unsafe.  But  the  goods  are  in  the  hands  of  the  buyer, 
and  since  he  holds  title  to  them,  they  can  be  conveniently  used 
as  collateral.  Furthermore,  a  borrower  may  be  able  to  secure 
larger  advances  in  this  way,  as  when  produce  dealers  have  ex- 
hausted their  line  of  credit  with  their  banks  and  desire 
further  advances  of  funds.  But  the  loans  would  seldom  be 
made  if  the  bank  could  not  rest  the  further  credit  on  its  con- 
fidence in  the  buyer  and  in  his  ability  to  market  the  goods. 

In  the  marketing  of  raw  materials  in  particular  this  type 
of  loan  is  important.  From  the  time  when  grain  or  cotton, 
for  example,  is  sold  at  the  farm  the  goods  are  commonly 
used  as  the  basis  for  loans  by  means  of  which  those  who  own 
them  can  procure  funds  for  making  further  purchases.28  These 
loans,  in  turn,  are  liquidated  when  the  product  has  been  re- 
sold. 

"The  cotton  buyers  make  arrangements  with  the  local  bankers 
where  the  gins  are  located,  for  the  payment  of  the  cotton,  the 
banks  furnishing  actual  cash  against  tickets  issued  by  the  buyer's 
representatives,  holding  the  tickets  in  question  as  their  collateral 

27  But  many  buyers  cannot  get  funds  from  the  bank.  Their  credit  is 
so  poor  that  only  supply  houses  who  can  watch  them  closely  will  risk 
the  danger  of  loss. 

23  Cotton  is  sometimes  hypothecated,  a§  the  basis  for  money  bor- 
rowed, or  goods  secured  on  credit,  even  before  it  has  been  sold  by  the 
grower. 


346  PRINCIPLES  OF  MARKETING 

in  the  meantime.  When  a  sufficient  amount  of  cotton  has  been 
accumulated  the  local  banker  at  the  request  of  the  buyer's  agent 
delivers  the  tickets  in  question  to  the  local  agent  of  the  railroad, 
who  in  turn  issues  a  bill  of  lading  covering  the  shipment  to  com- 
press point,  which  then  is  attached  to  the  draft  drawn  by  the 
buyer's  agent  upon  the  buyer's  head  office,  which  draft  includes  the 
price  paid  for  the  cotton  plus  interest  and  exchange  charged  by 
the  local  banker,  who  is  reimbursed  by  the  amount  of  the  draft 
thus  drawn.  When  this  cotton  is  ready  for  export  local  bills  of 
lading  covering  shipment  from  point  of  origin  to  compress  point 
are  exchanged  by  the  cotton  buyer's  banker  for  local  bills  of  lading 
to  port  or  for  through  bills  of  lading."  2 

III 

Particular  Credit  Devices. — Promissory  notes  and  drafts 
are  used  less  in  American  trade  than  in  foreign  trade.  They 
are,  in  fact,  used  far  less  in  American  trade  to-day  than  they 
have  been  in  the  past.  Two  important  reasons  for  this  exist. 
One  is  the  cash  discount;  the  other  is  the  tendency  to  buy  in 
small  amounts  and  at  frequent  intervals.  With  the  develop- 
ment of  cash  discounts,  it  has  become  the  custom  for  dealers 
to  make  payment  for  goods  soon  after  the  receipt  of  the 
bill.  Such  sales  are  often  carried  on  the  books  in  the  mean- 
time as  open  accounts.  With  the  cash  discount  there  is  an 
option  of  paying  any  one  of  two  or  three  prices,  each  at  a 
different  time.  The  exact  amount  of  the  bill  is,  therefore,  not 
known  by  the  seller  at  the  time  the  sale  is  made.  In  lines 
where  open  book  accounts  prevail,  when  a  promissory  note  ap- 
pears it  is  usually  the  note  of  a  poor  credit  risk  who  has  not  met 
his  obligations  within  the  prescribed  time.  With  improvements 
in  transportation  and  the  tendency  for  merchandisers  to  do  a 
large  volume  of  business  on  a  small  stock  investment,  ship- 
ments have  come  to  involve  relatively  small  amounts.  It  is 
inconvenient  to  settle  bills  for  such  small  accounts  with 
promissory  notes  or  drafts.  Furthermore,  credits  can  be  more 

28  John  J.  Arnold,  "Financing  of  Cotton,"  Annals  oj  the  American 
Academy,  Vol.  38  (Sept.,  1911),  p.  601. 


MARKET  FINANCE  347 

closely  watched  under  these  conditions  and  the  credit  granted 
to  any  one  house  at  one  time  is  small.  Consequently,  there 
has  developed  a  preference  for  the  book  account.30 

Promissory  notes  occupy  an  important  position,  however, 
in  some  lines.  In  the  sale  of  products  of  relatively  large  value, 
payment  for  which  is  made  in  installments — for  example, 
equipment  for  farm,  factory,  and  store — part  payments  are 
frequently  provided  for  by  obtaining  notes  from  the  buyer. 
The  same  method  is  sometimes  used  in  the  sale  of  real  estate, 
houses,  household  goods,  motor  vehicles,  and  consumption 
goods  of  large  value.31 

In  trades  in  which  the  buyer  gives  a  note  or  accepts  a 
draft  in  the  purchase  of  goods,  the  seller  may  or  may  not  use 
the  note  as  the  basis  for  his  own  borrowings.  If  his  credit 
is  good  and  if  the  notes  are  from  many  sources  and  in  small 
amounts  he  may  simply  hold  them,  and  borrow  on  his  own  un- 
secured note.  In  such  cases  the  banks  do  not  know,  and 
cannot  afford  to  determine,  the  credit  standing  of  the  note 
makers,  but  depend  on  the  seller's  credit.  If  his  credit  is  not 
so  good  as  is  that  of  the  note  maker,  or  if  the  notes  are  for 
large  amounts,  he  may  endorse  them  and  discount  them  at 
his  bank  or  sell  them  through  note  brokers. 

30  Other  reasons  for  the  tendency  to  eliminate  drafts  and  notes  is  the 
mitigation  of  the  doctrine  of  caveat  emptor  and  the  substitution  of  im- 
plied warranties.    That  is,  the  old  rule  of  the  "buyer  beware"  has  been 
changed  by  legal  action  and  trade  practice.    There  are,  consequently, 
often  adjustments  in  price  which  must  be  made  when  the  quality  of 
the  goods  does  not  fulfill  the  contract,  expressed  or  implied.    This  is  a 
further  condition  which  makes  it  impossible  to  know  the  exact  amount 
of  a  bill  at  the  time  when  the  draft  would  be  drawn  or  the  note  made 
out.    See  the  Brief  of  the  Merchants'  Association  of  New  York,  filed 
before   the   Federal   Reserve   Board,    concerning   the    quality   of   paper 
eligible  for  rediscount,  quoted  in  Kniffin,  op.  cit.,  pp.  470-475. 

31  An  interesting  development  of  recent  years  is  found  in  the  sale  of 
automobile  paper  and  the  rise  of  a  special  type  of  house  to  act  as  an 
intermediary  between  the  dealer,  who  takes  the  notes,  and  the  com- 
mercial  banks.    See    H.    G.    Moulton,    The   Financial    Organization   oj 
Society  (1921),  pp.  437-454. 


348  PRINCIPLES  OF  MARKETING 

Drafts. — Many  transactions  are  financed  by  means  of  drafts 
drawn  by  the  seller  on  the  buyer.32  These  are  often  ac- 
companied by  the  documents  carrying  title  to  the  goods,  such 
.  as  bills  of  lading  or  warehouse  receipts,  and  title  to  the  goods 
does  not  pass  to  the  buyer  until  the  draft  is  paid  or  accepted. 
When  a  draft  is  accepted  by  the  buyer  it  becomes  virtually 
a  promissory  note,  which  may  be  discounted  in  the  money 
market  or  held  by  the  seller  until  maturity.  In  this  latter 
case  he  may  get  funds,  as  with  the  promissory  note,  by  bor- 
rowing at  the  bank.  But  there  is  then  no  necessary  connec- 
tion between  the  accepted  draft  and  his  own  transaction  at 
the  bank;  they  are  distinct.  Such  a  draft,  accompanied  by 
the  documents  and  accepted  by  the  buyer,  is  the  trade  ac- 
ceptance, an  instrument  brought  into  prominence  since  the 
establishment  of  the  Federal  Reserve  System.33  When  the 
buyer  makes  an  arrangement  by  which  such  drafts  will  be 
accepted  by  a  bank  on  which  they  are  drawn— -bank  accep- 
tances— they  become  the  easiest  kind  of  paper  to  discount 
in  the  market. 

Commercial  Paper.- — Mention  has  been  made  several  times 
of  firms  borrowing  money  on  their  unsecured  note  rather  than 
utilizing  any  form  of  security,  whether  it  be  the  security  of 
the  goods  themselves  or  the  note  or  draft  of  the  buyer.  When 
such  paper  is  sold  in  round  denominations  for  a  definite  period 
of  time,  to  banks,  or  through  note  brokers,  or  to  commercial 
paper  houses  for  resale  to  commercial  banks  or  other  investors 
in  the  open  market,  it  is  called  "commercial  paper."  Paper 
which  has  its  origin  in  actual  commercial  operations  is  also4 
called  commercial  paper.  This  latter  class  of  paper  has 
been  given  great  emphasis  under  the  Federal  Reserve  System. 
The  characteristics  of  such  commercial  paper,  as  laid  down 
by  the  Federal  Reserve  Board,  are  that  it  shall  be  paper  drawn* 
for  agricultural,  industrial,  or  commercial  purposes.  In  in- 

33  In  Europe  and  in  foreign  •  trade,  commercial  transactions  are  quite 
universally  financed  in  this  way. 
33  See  Moulton,  op.  cit.,  pp.  162  ff. 


MARKET  FINANCE  349 

dustrial  and  commercial  transactions  it  must  not  run  for  more 

1  than  90  days;  in  agricultural  transactions  6  months  is  allowed. 

And  the  notes  must  be  self-liquidating,  that  is,  drawn  for 

'the  purpose  of  moving  commodities  to  market.    It  is  further 

assumed  that  the  sale  of  the  commodities  involved  will  furnish 

the  funds  with  which  to  pay  the  notes. 

Cold  Storage  Finance. — An  interesting  variation  in  market 
finance  is  found  in  the  case  of  products  held  in  cold  storage. 
There  are  many  small  dealers  with  relatively  small  capital 
who  purchase  eggs,  for  example,  in  the  spring  and  hold  them 
over  into  the  fall  and  winter.  They,  like  many  other  buyers 
of  eggs,  place  their  stock  in  a  cold  storage  plant.  To  finance 
their  operations  they  borrow  from  the  cold  storage  dealer,  giv- 
ing control  over  the  title  to  the  eggs  in  storage  as  security. 
But  the  cold  storage  plant  does  not  furnish  the  money;  it  in 
turn  utilizes  its  own  credit,  with  the  eggs  as  collateral,  and 
borrows  from  the  banks.  The  dealer  thus  acts  not  only  as  a 
functional  agency  for  the  storage  of  products,  but  as  a  func- 
tional financial  middleman  as  well. 


CHAPTER  XVII 
MARKET  RISK 


Market  risk  is  due  primarily  to  fluctuations  in  prices. 
That  is,  price  changes  cause  actual  loss,  or  the  loss  of  potential 
profit,  to  those  who  own  goods  and  to  those  who  must  pur- 
chase them.  If,  for  example,  the  price  at  which  a  farmer 
sells  his  grain  is  higher  than  the  cost  of  producing  it,  the 
farmer  gains;  but  those  who  purchase  are  forced  to  pay  the 
higher  price.  If  they  had  anticipated  a  lower  price,  potential 
profits  decline,  or  actual  loss  results  to  some  or  all  of  them. 
But  when  the  price  is  low  the  gain  is  theirs,  and  the  loss  is 
sustained  by  the  farmer.  All  producers  bear  risks  of  this 
kind.  And  all  middlemen,  particularly  merchants,  are  con- 
fronted by  them.  Anything,  then,  which  affects  the  demand 
or  supply  for  a  product,  or  which  brings  about  a  maladjust- 
ment of  demand  and  supply,  such  as  poor  crops,  deterioration 
of  goods  in  storage,  style  changes,  influences  its  market  price, 
or  the  price  of  particular  lots  of  it,  and  may  thereby  cause 
loss  to  some  and  gain  to  others.  It  is  the  danger  of  loss  from 
circumstances  which  are  not  foreseen  that  is  here  called  market 
risk. 

Time  Risks. — In  most  market  transactions  the  risk  in- 
volved is  due  to  the  passage  of  time.  Goods  or  services  are 
bought  with  the  hope  or  expectation  that  they  can  be  sold 
later  at  a  price  that  will  net  a  profit,  but  in  the  meantime 
prices  may  fall  or  the  product  may  deteriorate.  The  merchant 
incurs  such  a  risk  when  he  buys  a  product  in  the  wholesale 
market  for  later  sale  in  the  retail  market;  the  retailer  runs 

350 


MARKET  RISK  351 

a  similar  risk  in  buying  from  the  jobber,  expecting  to  sell 
at  a  profit  to  the  consumer.  But  if  consumers  will  not  buy 
at  a  price  that  is  profitable  to  the  retailer,  he  must  stand 
a  loss.  He  may  even  be  unable  to  pay  the  jobber  for  the 
goods.  In  any  case  he  will  be  unwilling  to  buy  at  the  old 
price,  and,  perhaps,  in  the  former  volume.  The  jobber,  never- 
theless, may  have  already  bought  from  the  producer,  and  so 
he,  in  turn,  suffers  loss.  The  producer  incurs  a  like  risk,  for 
he  must  use  capital,  labor,  and  raw  materials  in  producing  his 
product,  although  by  the  time  it  is  ready  for  market  there 
may  be  no  demand,  or  such  demand  as  exists  may  be  at  a 
price  so  low  that  loss  will  ensue.  The  man  who  buys  a  house 
runs  a  risk  that  real  estate  values  may  decline  or  architectural 
styles  may  change.  And  he  may  find  consequently,  that  his 
house  is  not  salable  at  a  profit,  or,  if  he  bought  it  for  a  home, 
that  it  does  not  give  him  a  degree  of  satisfaction  correspond- 
ing to  the  investment.  So  any  investor  incurs  a  risk  that  the 
value  of  an  investment  will  decline  until  his  income  therefrom 
is  smaller  than  he  had  anticipated,  and  that  the  principal 
sum  may  be  partially  or  completely  lost. 

Place  Risk. — Place  risks  are  now  minimized.  Market  news 
spreads  so  rapidly  that  in  well  organized  markets  it  is  seldom 
possible  to  buy  goods  in  a  market  where  prices  are  low,  trans- 
port them  to  a  market  in  which  prices  are  higher,  and  there 
sell  at  an  extraordinary  profit.  Neither  is  it  likely  that  goods 
purchased  in  one  market  will  have  to  be  sold  at  a  heavy 
loss  in  another  market,  simply  because  prices  are  lower  there 
than  in  the  first.  This  is  because  of  the  fact  that  such  gains 
or  losses  as  these  can  arise  only  out  of  the  lack  of  knowledge 
of  conditions  in  one  market  by  those  who  are  in  another. 
But  in  dealing  with  markets  which  are  not  highly  organized, 
with  perishable  commodities,  or  with  ignorant  people,  profits 
may  be  taken  and  losses  occur  because  prices  in  different 
markets  are  out  of  line  with  one  another.  That  is,  the  differ- 
ent price  levels  are  due  to  the  fact  that  the  commodities  are 
in  different  places,  rather  than  to  the  fact  that  a  period  of 


352  PRINCIPLES  OF  MARKETING 

time  has  elapsed  during  which  prices  for  the  commodity 
have  changed  in  all  markets. 

The  Influence  of  Roundabout  Production  on  Risk. — The 
roundabout  method  of  production  makes  the  time  element 
particularly  important,  and  so  is  an  important  cause  of  market 
risks.  Production  commonly  involves  fixed  investments  and 
heavy  expenditures  which  may  have  to  be  made  years  before 
the  proceeds  can  be  expected  to  return  profits  or  to  safe- 
guard the  principal;  and  it  frequently  takes  months  to  pre- 
pare a  product  for  market.  A  steel  manufacturer  hires  labor, 
buys  land,  constructs  a  plant,  and  procures  materials  with 
which  to  make  steel  to  sell  to  a  manufacturer  of  machines. 
The  manufacturer  of  machines  in  turn  has  invested  with  the 
expectation  of  selling  his  machine  to  a  manufacturer  of  bir 
cycles,  and  the  bicycle  manufacturer  purposes  to  sell  his 
product  to  the  public.  But  in  the  meantime  automobiles 
and  motorcycles  are  put  on  the  market  at  prices  which  cur- 
tail the  profitable  demand  for  bicycles.  This  necessitates  a> 
readjustment  all  along  the  line. 

Of  course,  it  is  true  that  the  plant  of  each  manufacturer 
can  be  adjusted  to  the  new  needs  of  the  market.  But  this 
may^involve  expenses  which  were  not  anticipated  and  which 
some  of  the  manufacturers  may  be  unable  to  meet.  Other 
manufacturers,  furthermore,  may  have  foreseen  the  change 
that  was  to  take  place  and  have  taken  the  cream  of  the  new 
market  themselves.  If  those  who  were  less  successful  in  their 
forecast  of  the  market  succeed  in  gaining  an  adequate  demand, 
it  may  be  only  at  an  excessive  selling  cost. 

Or  in  an  even  more  frequent  case,  a  manufacturer  of  auto- 
mobiles may  estimate  that  he  can  make  a  certain  number  of 
sales  during  the  season,  and  so  prepare  to  produce  an  equal 
number  of  cars.  But  when  the  season  opens,  although  he  has 
a  large  stock  ready  to  ship  and  materials  and  equipment  and 
labor  for  making  more,  his  cars  may  not  sell  as  rapidly  as  he 
had  anticipated;  or  perhaps  the  demand  for  his  automobiles 
may  be  good  for  a  time,  but  eventually  he  may  lose  business 


MARKET  RISK  353 

to  competitors  or  to  the  manufacturer  of  aeroplanes.  Again, 
hard  times  may  depress  the  market,  or  transportation  facili- 
ties prove  inadequate  to  bring  supplies  to  the  plant  and  move 
the  cars  to  the  market. 

A  large  part  of  the  investment  in  modern  industry  is  rela- 
tively permanent,  and  often  cannot  be  salvaged  after  un- 
fortunate market  changes,  except  by  changing  the  equipment 
and  the  product  manufactured.  This  may  involve  great  ex- 
pense and  even  then  the  market  may  not  be  large  enough  to 
take  the  new  output  at  a  price  that  will  net  a  profit.  If  the 
new  product  does  not  appeal  to  the  public,  or  if  the  plant  can- 
not be  readily  transformed,  it  may  even  be  necessary  to  sell 
the  plant  at  a  considerable  loss.  In  addition,  surplus  stocks 
containing  the  results  of  large  investments  in  labor,  ma- 
terials, and  capital  may  lie  in  the  warehouse  unsold,  or  they 
may  have  to  be  sold  at  less  than  cost.  It  is  evident  that,  since 
the  investment  and  expenses  of  many  producers  anticipate  the 
market  for  years  ahead,  an  error  in  judgment  or  a  change 
in  conditions  may  result  in  large  losses. 

Risks  of  Competition. — A  general  change  in  demand  is  not 
the  only  market  risk  that  the  producer  must  face.  A  com- 
petitor may  revise  his  method  of  manufacturing  so  as  to  im- 
prove the  quality  or  lower  the  costs  of  his  merchandise,  or  he 
may  improve  his  methods  of  selling.  In  consequence,  prices 
may  be  cut  and  demand  be  diverted  by  competitors  until  a 
particular  producer,  if  he  cannot  utilize  the  same  or  equally 
successful  methods,  is  forced  to  sell  at  a  loss  or  even  to  go  out 
of  business.  Merchants  likewise  have  this  to  contend  with. 
The  indifferent  country  storekeeper  finds  that  he  is  losing  his 
trade  to  an  up-to-date  competitor  around  the  corner,  or  to  the 
mail  order  house,  or  to  the  new  branch  of  the  chain  store;  or 
that  the  interurban  and  automobile  make  it  possible  for  his 
customers  to  trade  at  the  city  near  by.  Finally,  risk  arises 
because  the  consumer  is  a  complex  individual  with  variable 
likes  and  dislikes  whose  demands  are  easily  influenced  through 
education,  changing  environment,  styles,  fashions,  seasons,  and 


354  PRINCIPLES  OF  MARKETING 

the  efforts  of  vendors  to  create  demand ;  and  whose  purchasing 
power  is  altered  through  changes  in  status,  local  prosperity, 
depressions,  panics,  and  crises. 

Other  Risks. — Enough  has  been  said  to  show  that  business 
is  an  undertaking  involving  great  risk,  risk  which  arises  pri- 
marily out  of  market  conditions.  But  there  are  two  other 
familiar  classes  of  risk  to  which  the  business  man  is  subject, 
and  which  may  have  a  very  direct  effect  on  his  marketing 
activities  and  their  financial  results.  There  are  what  may  be 
called  natural  risks:  rain,  wind,  lightning,  hail,  earthquakes, 
disease,  vermin,  heat,  and  cold.  And  there  are  other  risks 
which  arise  partially,  or  wholly,  out  of  the  human  element 
and  only  partially  from  natural  causes:  fire,  accidents,  losses 
at  sea,  losses  from  bad  debts,  dishonesty  (moral  hazard),  in- 
competence, strikes,  and  lockouts. 

II 

Some  Methods  for  Minimizing  Risk!  Prevention. — Effort 
is  constantly  being  made  to  eliminate  risk  altogether,  or  else 
to  minimize  its  effects.  A  great  part  of  this  effort  con- 
sists in  shifting  snjnp,  partf  or^all  of  the  risk  to  others^ who  are 
more  willing  or  better  qualified  to  bear  it.  Another  im- 
portant method  of  dealing  with  risk  is  to  do  awayjszith  its 
causes,  or  at  least  to  minimize  the  chances  of  the  Toss.  Insur- 
anc"e~'a»d  hedgmg  ai'O  important  examples  of"  the  first.  Ex- 
amples of  the  second  include  the  following:  an  increase  in  the 
knowledge  of  market  conditions  on  the  part  of  business  men, 
with  a  corresponding  decrease  in  the  purely  market  risks;  the 
construction  of  fireproof  buildings  and  fire  escapes  to  de- 
crease the  fire  hazard;  safety  vaults,  police  systems,  burglar 
alarms,  and  the  inculcation  of  ideals  of  honesty  to  minimize 
losses  from  burglary  and  theft;  mechanical  safety  devices  and 
education  in  "safety  first"  to  reduce  the  number  of  accidents; 
and  education  in  effective  business  methods  to  reduce  the  risks 
from  incompetence. 


MARKET  RISK  355 

Minimizing  Market  Risks. — It  has  been  shown  that  the 
risks  which  arise  from  the  market  are  due  to  unexpected 
changes  in  the  demand  and  supply  of  commodities.  These 
risks  are  particularly  important  to  modern  specialized  pro- 
ducers. Since  they  produce  in  advance  of  the  final  demand 
for  their  product,  it  is  evident  that  loss  may  result  either 
from  a  reduced  demand  or  an  increased  supply  of  the  goods 
they  are  producing.  Among  the  more  important  means  of 
reducing  such  risks  are: 

1.  Government  regulation  and  guaranty  of  price  and  service. 

2.  Effective  sales  efforts. 

3.  Associations  and  combinations  among  competitors. 

4.  Knowledge  of  the  market. 

5.  Shifting  and  dividing  risk. 

When  the  government  guarantees  a  minimum  price  for 
wheat,  the  risk  of  loss  from  a  lower  price  is  removed  from  the 
farmer.1  When  a  maximum  price  for  the  railroad  rate  be- 
tween two  points  is  definitely  established  the  risk  to  the 
manufacturer  of  paying  a  higher  rate  than  had  been  con- 
templated when  prices  were  quoted  or  when  orders  were  taken 
is  eliminated.  When  rebates  are  made  illegal,  and  the  law 
is  enforced,  small  manufacturers  are  saved  from  the  loss  that 
may  arise  from  a  larger  competitor's  ability  to  undersell  them 
because  he  receives  rebates. 

Goods  may  be  advertised  extensively  with  a  view  to  increas- 
ing or  maintaining  demand  and  avoiding  the  risk  of  substitu- 
tion. Buyers  are  made  familiar  with  certain  trade-marks  and 
brands  through  advertising,  until  there  is  little  danger  that  the 
manufacturer  will  lose  a  sale  through  the  substitution  by  the 
retailer  of  another  product  which  the  consumer  ignorantly 
accepts  as  the  one  he  asked  for.  If  the  seller  can  convince  the 
buyer  that  his  product  is  the  best,  he  has  removed  a  large  part 

*It  is,  however,  shifted  to  the  government.  If  the  guaranteed  price 
causes  over-production  a  greater  social  loss  occurs  than  would  have 
otherwise  been  felt. 


356  PRINCIPLES  OF  MARKETING 

of  the  danger  that  any  other  product  will  be  substituted. 
Even  though  this  may  not  be  possible,  selling  effort  may, 
nevertheless,  create  a  favorable  attitude  of  mind  which  makes 
later  sales  efforts  more  effective.  Through  such  means  mar- 
kets are  maintained  or  improved,  and  the  risk  of  loss  from  a 
declining  demand  is  reduced. 

fltinns  among  com- 
peting firms  tends   also  tnrgdune  market  risk.     An  under- 

- 

manufacturers  that  they  will  allow 
days'  credit  reduces  the  credit  risk  and  regulates  com- 
petition in  credit  giving.  An  agreement  to  sell  fresh  fruits  at 
prices  established  by  a  local  grocers'  board  does  away  with 
competition  which  might  be  manifested  in  price-cutting;  an 
agreement  to  make  but  two  deliveries  a  day,  or  the  establish- 
ment of  a  cooperative  delivery  service  lessens  competition  in 
delivery  service,  and  so,  as  in  the  last  case,  narrows  the  field 
of  competition  and  makes  it  easier  to  estimate  and  control. 
An  agreement  among  paper  manufacturers  to  allot  territory 
among  certain  manufacturers  on  an  agreed  basis,  or  to  limit 
production  to  an  agreed  maximum,  likewise  limits  risks.  An 
understanding  among  competing  coal  or  oil  producers  to  fol- 
low the  prices  of  a  particular  large  operator  stabilizes  price 
competition;  so  do  the  activities  of  open  price  associations.2 

Again,  when  a  manufacturer  or  dealer  buys  up  strong  com- 
peting manufacturers  or  dealers,  he  thereby  removes  com- 
petitors, and  so  reduces  the  risk  in  his  market.  Perhaps  the 
chief  object  of  the  so-called  "trusts"  has  been  to  reduce  or  to 
remove  entirely  certain  risks  of  the  market,  with  a  particular 
view  toward  eliminating  the  risks  that  arise  from  competition. 
/ ^finimi^inq  Risk  Through  Knowledge,  of  OWL  Afark et. — 
Since  market  risks  arise  from  changes  in  the  conditions  of 
demand  and  supply  an  important  means  of  reducing  them  is 
to  obtain  a  correct  knowledge  of  the  market,  present  and 
future.  If  a  manufacturer  knows  there  is  to  be  a  shortage  of 
raw  material  which  is  essential  to  his  business,  he  is  likely  to 

2  See  pp.  389-390. 


MARKET  RISK  357 

go  into  the  market  early  in  order  to  buy  it  as  cheaply  as  pos- 
sible, or  even  to  make  sure  that  it  can  be  procured  at  all.  On 
the  other  hand,  if  he  knows  that  the  price  of  that  raw  material 
is  likely  to  go  down  in  the  immediate  future,  he  will  wait  until 
it  is  actually  needed  before  ordering  so  that  he  can  take  advan- 
tage of  the  lower  price.  It  is  to  avoid  risks  such  as  are  here 
suggested  that  the  various  means  of  assuring  a  supply  of  raw 
materials  described  in  Chapter  VI  are  used.  The  more  knowl- 
edge the  merchandiser  has  of  market  conditions,  the  more  his 
plans  can  be  made  to  conform  to  actual  market  conditions  as 
they  unfold.  Market  risk  is  thereby  reduced.3 

With  the  rapid  perfection  of  the  means  of  communication 
and  the  accompanying  increase  in  the  knowledge  of  market 
conditions,  it  would  seem  that  market  risk  could  be  increas- 
ingly minimized.  But  industry  and  commerce,  on  the  other 
hand,  are  constantly  growing  more  complex  and  market  con- 
ditions more  difficult  to  forecast.4 

Shifting  Risk. — Government  assistance,  effective  sales  ef- 
fort, cooperation  or  combination  among  competitors,  and 
accurate  market  forecasts  are  all  important  means  for  lessen- 
ing market  risks.  But  in  many  cases  they  are  not  available 
or  not  effective.  This  is  particularly  true  of  market  fore- 
casts. For,  even  with  the  best  available  market  news  service, 
forecasts  of  the  market  are  far  from  accurate.  Thus,  of 
the  factors  affecting  demand,  many  cannot  be  predicted  far 
enough  in  advance  to  remove  risk  from  the  producers  and 
merchants  who  undertake  to  supply  our  needs.  For  example, 

8  For  further  discussion  of  market  news  see  Chap.  XVIII. 

*Thus  it  seems  unquestionable  that  our  recurring  crises  arise  funda- 
mentally out  of  a  lack  of  information  of  the  market  on  the  part  of 
large  numbers  of  business  men,  and  commercial  crises  are  relatively 
modern  phenomena.  It  may  be  that  we  shall  eventually  reach  a  condi- 
tion where  our  knowledge  of  the  market  will  be  sufficient  to  eliminate 
such  phenomena  entirely;  but  it  is  doubtful  whether  that  will  occur 
until  industrial  change  becomes  less  rapid  than  it  is  today.  See  W.  C. 
Mitchell,  Business  Cycles  (1913)  and  The  Business  Cycle  (1921),  a 
reprint  of  articles  published  in  the  New  York  Evening  Post. 


358  PRINCIPLES  OF  MARKETING 

natural  causes  which  affect  the  market  are  very  important, 
but  they  are  not  predictable  with  any  degree  of  certainty.  A 
cold  winter  causes  a  fuel  shortage  because  demand  is  greater, 
and  transportation  may  be  tied  up;  a  warm  winter  means  a 
smaller  demand.  A  cold  spring  reduces  the  demand  for  season- 
able clothes  and  foods.  Again,  the  uncertainty  of  human  de- 
sire makes  a  correct  anticipation  of  the  market  difficult.  A 
"buyers'  strike"  may  develop  which  will  cause  a  decline  in  the 
demand  for  all  kinds  of  goods,  or  it  may  be  directed  at  specific 
commodities — as  some  of  the  attempts  of  women's  organiza- 
tions to  prevent  the  purchase  of  high-priced  butter  and  eggs 
during  the  winter  months.  But  this  difficulty  is  particularly 
important  in  the  sale  of  style  goods.  Styles  may  be  incorrectly 
forecasted  or  popular  styles  may  decline  in  favor  more  rapidly 
than  was  anticipated.  Finally,  the  sales  efforts  of  some  com- 
peting firm  may  prove  to  be  so  effective  that  they  divert  de- 
mand from  other  producers. 

On  the  side  of  supply,  two  very  important  factors  are  com- 
monly difficult  to  forecast.  One  of  these  is  the  volume  of 
goods  which  competing  producers  are  going  to  have  for  sale. 
This  is  particularly  difficult  to  forecast  in  a  small  scale 
industry,  such  as  agriculture.  A  large  crop  of  cotton  may 
lead  to  a  general  understanding  that  a  smaller  crop  should 
be  produced,  but  no  one  could  be  certain  until  after  planting 
that  the  suggestion  would  be  generally  observed.  The  sec- 
ond factor  applies  particularly  to  farm  products:  the  volume 
of  production  is  in  a  great  degree  beyond  human  control, 
for  the  action  of  natural  forces  in  determining  the  amount 
and  the  quality  of  a  crop  cannot  be  accurately  predicted. 

Since  many  market  risks  cannot  be  avoided,  they  must  be 
borne  by -someone.  But  they  may  often  be  shifted  from  the 
shoulders  of  individual  .entrepreneurs  by  means  of  contracts, 
or  divided  among  them  by  means  of  insurance. 

The  Contract  Shifts  Risk. — Risks  are  commonly  shifteclby 
contracts  of  purchase  aricTsale.  An  illustration  of  this  method 


MARKET  RISK  359 

of  shifting  risk  can  be  taken  from  the  building  industry.5  A 
corporation  desires  to  construct  an  office  building.  After  it 
has  decided  upon  the  plans,  it  may  call  for  tenders  from  con- 
tractors. The  contractors  make  their  estimates  on  the  basis 
of  their  knowledge  of  the  construction  business,  and  of  such 
factors  as  the  cost  of  materials,  the  conditions  of  the  labor 
market,  and  the  time  of  year.  Then,  when  the  contract  is 
let,  the  successful  contractor,  probably  on  the  basis  of  previous 
understandings  on  which  he  has  based  his  original  estimate, 
may  proceed  immediately  to  let  sub-contracts  for  materials 
and  for  the  construction  of  certain  parts  of  the  building. 
He  contracts  to  buy  cement,  sand,  stone,  and  steel,  with 
which  to  construct  the  reenforced  concrete  parts  of  the  build- 
ing; he  contracts  for  the  plumbing  and  the  wiring  with  other 
contractors,  who  in  turn  contract  for  the  materials  they  will 
use.  In  this  way  the  original  contractor  avoids  all  risk  to 
himself  save  that  arising  out  of  the  possible  failure  of  some 
of  those  with  whom  he  has  contracted  to  meet  their  obligations, 
and  those  which  arise  out  of  incorrect  estimates  he  may  have 
made  regarding  the  time  of  constructing  his  own  part  of  the 
job,  and  concerning  his  own  expenses  for  labor,  materials,  and 
management.6 

Contracting  Minimizes  Total  Risk. — Risk  is  shifted  in  such 
instances;  but  it  is  also  minimized.  Each  one  with  whom  con- 
tracts are  made  is  supposedly  an  expert  in  his  special  field. 
Expert  knowledge  of  the  market  insures,  consequently,  that 
materials  will  be  bought  under  the  most  favorable  circum- 
stances. This  enables  each  specialist  to  offer  a  price  that  is 

5  See  also  pp.  101-102. 

eln  times  when  deliveries  are  uncertain,  and  prices  and  wages  are 
tending  to  increase  rapidly,  contractors  are  often  unwilling  to  contract 
to  deliver  at  a  stipulated  price.  Under  such  circumstances  they  may 
shift  the  risk  upon  the  party  desiring  the  building  by  agreeing  to  con- 
struct it  at  cost  plus  an  agreed  lump  sum,  or  for  a  certain  percentage 
of  cost.  The  cost-plus  contracts  with  the  government  during  the  World 
War  arose  in  part  out  of  such  conditions. 


360  PRINCIPLES  OF  MARKETING 

lower  than  that  which  the  general  contractor  would  have 
based  his  estimates  on  had  he  himself  been  forced  to  take 
the  entire  risk.  Knowledge  of  the  various  markets  involved 
in  the  construction  of  the  building  is  very  much  greater 
under  these  circumstances  than  it  would  be  if  the  original 
contractor  should  forecast  all  the  markets  and  bear  all  the 
risk.  Consequently,  the  total  risk  is  less.  Furthermore,  the 
averaging  of  risks  by  those  who  contract  reduces  the  danger 
from  a  failure  to  anticipate  adequately  future  conditions  in 
a  particular  case.  This  is  especially  true  of  those  who  pro- 
vide materials.  They  know  that  there  will  be  losses  on  an 
order  now  and  then  but  that  there  will  be  greater  profits 
on  other  orders  than  they  had  anticipated.  In  a  competitive 
business,  consequently,  prices  will  be  quoted  that  are  lower 
than  they  could  otherwise  be. 

Similar  examples  are  found  in  merchandising.  The  manu- 
facturer who  has  sold  his  output  for  a  year  in  advance  has 
removed  risk  on  the  demand  side  of  his  market.  If  he  con- 
tracts for  raw  materials  he  has  removed  risk  on  the  side  of 
supply.7  The  farmer  who  sells  his  crop  before  it  is  harvested, 
or  even  before  it  is  planted,  has  removed  risk  on  the  demand 
side.  Those  who  make  such  contracts  may  forego  the  chance 
of  larger  profits  from  a  market  offering  higher  prices  at  the 
time  they  are  called  on  to  deliver,  but  they  also  remove  the 
risk  from  a  falling  market. 

Middlemen  and  Market  Risk. — It  has  been  shown  in  earlier 
chapters  that  middlemen  perform  an  important  service  in 
bearing  market jjgks.  Raw  material  merchants  buy  directly 
from  producers,  frequently  before  contracting  for  resale. 
Merchants  are  very  important  in  the  marketing  of  farm  prod- 
ucts. Most  agricultural  products  are  ready  for  market  in 
great  quantities  during  short  seasons,  and  the  function  of 
carrying  them  over  so  that  they  may  be  consumed  uniformly 

'This  is,  of  course,  on  the  assumption  that  contracts  will  be  fulfilled, 
*nd  without  recourse  to  the  courts. 


MARKET  RISK  361 

throughout  the  year  is  performed  in  large  measure  by  whole- 
sale merchants.  Manufacturers  and  other  merchants  some- 
times contract  with  these  merchants  for  materials  not  yet 
in  their  possession,  so  that  their  risks  arise  from  both 
the  supply  and  demand  sides  of  the  market.  Merchants 
who  wholesale  manufactured  products  commonly  buy,  or  con- 
tract to  buy,  goods  before  they  are  sold  to  retailers,  and  in 
other  cases  contract  to  sell  to  retailers  before  they  have  the 
goods.  Finally,  retailers  contract  for  and  stock  goods  which 
consumers  have  not  ordered.  The  merchant  is  thus  important 
in  making  it  possible  for  producer  and  consumer  alike  to  shift 
risk.  As  a  specialist  in  distribution  with  an  expert  knowledge 
of  his  markets  he  is  peculiarly  fitted  to  do  this. 

The  Residual  Risk. — But  risk  which  is  shifted  must  be 
borne  by  some  one.  The  manufacturer  and  the  wholesale 
merchant  may  shift  a  large  element  of  risk  by  offsetting  con- 
tracts to  sell  by  contracts  to  buy,  and  vice  versa.  But  the 
"original"  producer  of  raw  materials  and  foods  and  thejei^il 
distributor  can  seldom  do  so.  The  farmer,  for  example,  nor- 
mally produces  in  anticipation  of  demand.  Only  in  rare  in- 
stances has  he  contracted  to  sell  before  production  begins.  At 
the  other  end  of  the  distributive  system  the  retailer  can  seldom 
shift  the  risk  he  bears.  He  buys  in  anticipation  of  consumer 
demand.  If  that  demand  fails  to  materialize  he  must  suffer 
loss. 

Organized  Dealing  in  "Futures." — The  shifting  of  risk  by 
means  of  the  purchase  and  sale  of  contracts  for  future  delivery 
is  so  important  that  the  future  markets  in  some  trades  center 
in  organized  exchanges  which  facilitate  and  control  transac- 
tions of  this  kind.  Exchanges  have  become  very  useful  in 
the  market  for  certain  staple  raw  materials,  particularly  grain 
and  cotton. 

These  organized  exchanges  afford  a  mechanism  widely  used 
in  shifting  market  risks.  The  principal  organization  features 
of  the  ordinary  exchange  may  be  briefly  summarized.  The 


362  PRINCIPLES  OF  MARKETING 

ol^ect  of  the  organization  is  to  facilitate  the  market  activities 
of  its  members.  It  does  not  buy  or  sell  products  as  an  organ- 
ization. But  it  provides  a  place  in  which  trading  can  be  car- 
ried on.  Some  exchanges  are  formed  to  regulate  and  facilitate 
dealings  in  a  wide  variety  of  merchandise,  but  others  confine 
their  activities  to  a  narrow  range  of  products  or  even  to  a 
single  one.  Examples  of  the  first  class  are  the  Boston  and 
New  York  produce  exchanges  and  the  Chicago  Mercantile 
Exchange.  The  Chicago  Board  of  Trade  and  the  Minneapolis 
Chamber  of  Commerce  are  examples  of  those  in  which  deal- 
ing is  confined  to  a  few  products,  chiefly  grains.  The  New 
Orleans  and  New  York  cotton  exchanges  are  confined  to  trad- 
ing in  a  single  commodity.  Many  exchanges,  however,  do  not 
provide  for  future  trading. 

The  chief  functions  of  exchanges  as  they  relate  to  trading 
in  contracts  for  future  delivery  ("futures")  are: 

1.  To  provide  a  trading  place. 

2.  To  determine  who  may  be  members  and  who  may  use 
the  exchange. 

3.  To  regulate  business  dealings. 

4.  To  establish  uniform  grades  for  products  and  a  system 
of  inspection. 

5.  To  assist  in  settling  disputes. 

6.  To  acquire  and  disseminate  market  news.8 

Shifting  Risk  through  Hedging:  Terminal  Elevators. — 

That  a  trader  may  gain  or  lose  as  a  result  of  transactions  on 
the  exchange  is  evident  without  illustration.  But  that  loss 

8  For  more  detailed  descriptions  of  the  organized  exchanges  the  reader 
is  referred  to  any  of  the  following:  H.  C.  Emery,  Speculation  on  the 
Stock  and  Produce  Exchanges  oj  the  United  States,  Columbia  Univer- 
sity Studies  in  History,  Economics,  and  Public  Law,  Vol.  VII  (1896); 
H.  H.  Brace,  The  Value  of  Organized  Speculation  (1913);  James  E. 
Boyle,  Speculation  and  the  Chicago  Board  of  Trade  (1920);  L.  D.  H. 
Weld,  The  Marketing  of  Farm  Products  (1915);  Report  of  the  Federal 
Trade  Commission  on  the  Grain  Trade  (1920),  Vol.  V. 


MARKET  RISK  363 

may  be  avoided  by  operating  on  the  future  market  is  not 
always  realized.  This  is  accomplished  through  what  is  called 
"hedging."  Hedging  involves  contracting  to  purchase  or  sell 
in  the  future  market  at  the  same  time  that  a  regular  busi- 
ness transaction  of  an  opposite  nature  is  started,  which  is  ,- 
also  to  culminate  in  the  future.  That  is,  a  purchase  of  goods 
to  be  sold  later  is  offset  by  a  sale  of  goods  for  future  delivery 
to  be  purchased  later  in  the  "future"  market,  or,  vice  versa, 
a  sale  is  offset  by  a  purchase.  This  is  done  on  the  assumption 
that  prices  in  the  cash  and  future  markets  tend  to  move_to- 
gether.  Hedging  is  not  confined  to  the  exchange  organized 
for  future  dealings.  It  is  simply  facilitated  thereby. 

One  of  the  most  important  examples  of  hedging  is  found  in 
the  operations  of  the  terminal  elevator  companies  of  the  grain 
trade.  These  merchants  buy  grain  as  it  comes  from  the 
country  districts  during  the  fall  and  hold  it  over  until  it  is 
wanted  by  the  mills  or  by  other  buyers.  Since  millions  of 
dollars'  worth  of  grain  are  handled  in  this  way  by  a  single 
dealer,  it  is  evident  that  a  ypry  small  phnnprp  jp  pricp  might, 
result_Jn  enormous  loss  or  even^_bankruptcy^.9  To  take  this 
chance  the  elevator  company  would  be  forced  to  pay  less  for 
the  grain  in  the  first  place,  for  it  could  not  take  the  risk  of 
such  losses  without  the  opportunity  likewise  to  make  large 
offsetting  profits.  The  existence  of  a  future  market  for  wheat, 
however,  through  the  system  of  hedging,  enables  the  elevator 
to  protect  itself  against  just  such  losses.  For  wheat  bought 
on  the  cash  market  can  be  immediately  hedged  by  making,  a 
gale  on  the  exchange  for  future  deliverv^  THigT  reduces  the 
likelihood  of  loss,  and  so  the  elevator  can  safely  pay  a  higher 
price  for  the  grain  it  stores.  The  elevator's  profit  is  the  dif- 
ference between  the  price  paid  for  the  grain,  and  the  future 
price  at  which  the  hedging  sale  was  made,  after  deductions 
are  made  for  the  cost  of  carrying  the  wheat,  interest  on  plant, 

9  Many  single  elevators  have  storage  room  for  more  than  a  million 
bushels,  and  some  of  the  grain  companies  own  several  elevators. 


364  PRINCIPLES  OF  MARKETING 

insurance,  organization  expenses,  and  so  on.  If  the  cash 
price  is  too  high  at  a  given  time  as  compared  with  the  future 
price,  it  is  evident  that  the  terminal  dealers  will  not  find  such 
transactions  profitable.10 

Contracting  for  Future  Delivery. — A  few  illustrations  of 
the  way  in  which  such  protection  operates  will  assist  the  dis- 
cussion. In  each  of  the  illustrations  it  has  been  assumed  that 
the  cost  of  carrying  the  grain  from  September  to  May  plus 
a  reasonable  profit  is  5  cents.  It  is  also  assumed  that  the 
grain  originally  purchased  was  delivered  to  meet  the  future 
contract  to  deliver.  But  the  elevator  need  not,  as  a  matter  of 
fact,  and  usually  does  not,  hold  the  cash  grain  it  buys  to  make 
delivery.  This  will  be  shown  later.  But  it  makes  the  later 
illustrations  more  easily  understood  to  assume  at  this  point  in 
the  discussion  that  actual  delivery  of  the  original  grain  is 
made.  When  that  is  done,  however,  the  transaction  is  really 
no  different  from  the  contracting  method  previously  described. 

CASE  1 

Bought  cash  wheat  September  10  at  $1.50.  Sold  September 

10  for  May  delivery  at $1.55 

May  price  at  which  wheat  could  have  been  sold  on  the  cash 

market  had  the  elevator  not  sold  on  September  10. .. .  1.55 


Loss  or  gain,  without  future  contract $0.00 

CASE  2 

Bought  cash  wheat  September  10  at  $1.50.  Sold  September 

10  for  May  delivery  at $1.55 

May  price  at  which  wheat  could  have  been  sold  on  the  cash 

market  had  the  elevator  not  sold  on  September  10 1.65 

Profit  foregone  through  future  contract $0.10 

10  See,  however,  the  Report  of  the  Federal  Trade  Commission  on 
Wheat  Prices  for  the  1920  Crop  (Dec.  13,  1920),  pp.  52-59,  where  hedg- 
ing with  the  future  price  of  grain  below  the  cash  price,  and  fluctuating 
rapidly  and  within  a  wide  range,  is  described.  See  also  pp.  370-371 


MARKET  RISK  365 

CASE  3 

Bought  cash  wheat  September  10  at  $1.50.  Sold  September 

10  for  May  delivery  at $1.55 

May  price  at  which  wheat  would  have  been  sold  on  the  cash 

market  had  the  elevator  not  sold  on  September  10 ....  1.05 

Loss  avoided  through  future  contract $0.50 

Trade  and  Speculative  Profit. — To  understand  the  advan- 
tages that  arise  from  transactions  of  this  kind  it  is  essential 
to  distinguish  between  what  is  called  "trade  profit"  and 
"speculative  profit."  1X  The  former  is  the  profit  which  a  mer- 
chant expects  to  get-  for,  performing  his  part  of  marketing. 
Thus,  the  terminal  grain  dealer's  service  is  to  hold  grain  over 
from  periods  of  abundant  production  for  use  in  periods  of 
scarcity.  The  trade  profit  of  the  dealer  who  hedges  arises 
out  of  the  difference  between  the  price  at  which  cash  grain  is 
bought  on  a  given  day  and  the  price  at  which  future  grain  is 
sold  on  that  day.12  Because  the  price  of  grain  may  fall  be- 
fore he  sells  his  grain,  the  dealer  hedges.  His  trade  profit  is 
thereby  protected.  He  foregoes,  however,  the  opportunity  of 
making  a  speculative  profit  which  would  arise  from  a  favor- 
able price  change.  The  manufacturer,  likewise,  who  fears  loss 
because  of  price  changes  may  protect  his  manufacturing  profit 
by  dealing  in  future  contracts.13 

In  the  illustrations  given  these  situations  can  be  traced. 
In  every  case,  the  terminal  elevator  bought  wheat  at  $1.50 
and  immediately  sold  it  at  $1.55  for  future  delivery.  The 

"See  S.  S.  Huebner,  "The  Functions  of  Produce  Exchanges,"  in  the 
Annals  of  the  American  Academy  of  Political  and  Social  Sciences,  Vol. 
XXXVIII  (1911),  pp.  342 ff. 

12  But  see  p.  370. 

13  See  the  statement  of  F.  M.  Crosby  before  the  Committee  on  Agri- 
culture, House  of  Representatives.  Jan.,   1921.     This  can  be  found  in 
Futures  Trading,  a  pamphlet  published  by  the  Chicago  Board  of  Trade, 
pp.  29-49. 


"366  PRINCIPLES  OF  MARKETING 

profit  from  such  transactions  arises  from  the  fact  that  the  cost 
of  carrying  the  grain  from  September  until  delivery  is  due  in 
May  will  be  less  than  the  margin  between  the  cash  and  future 
prices  at  which  the  elevator  bought  and  sold.  In  the  first 
case,  hedging  was  unnecessary,  for  when  May  came  the  cash 
price  was  $1.55,  the  price  the  dealer  had  anticipated  as  neces- 
sary to  net  him  a  profit.  In  the  second  case,  a  speculative 
gain  of  10  cents  was  lost  as  a  result  of  hedging.  For  although 
the  cash  price  was  $1.65  the  dealer's  grain  had  been  sold  at 
$1.55.  But  in  the  last  case  the  cash  price  had  declined  to 
$1.05.  If  the  elevator  had  not  hedged,  it  would  have  lost 
50  cents  a  bushel  in  addition  to  the  cost  of  carrying  the  grain. 
It  is  to  avoid  such  losses  as  this  that  the  hedge  is  used. 

The  Country  Elevator  Hedges. — The  country  elevator  may 
likewise  hedge.  Some  time  always  elapses  before  grain  can 
reach  the  market.  Furthermore,  the  elevator  may  wish  to 
hold  it,  or  may  be  unable  to  get  cars  in  which  to  ship  it. 
Whatever  the  cause,  if  time  must  elapse  between  purchase  and 
sale  of  grain,  there  is  danger  of  loss.14  When  the  grain  is 
finally  sold,  the  country  elevator  owner  has  no  more  need  fop 
the  hedging  sale,  since  his  own  grain  is  sold.  But  until  he 
cancels  this  hedging  sale,  he  bears  the  risk  of  a  rise  in  price- 
on  the  grain  he  must  purchase  to  meet  his  contract  when  it  is 
due.15  To  avoid  that  risk  his  representative  on  the  exchange 
purchases  the  same  amount  of  wheat  for  delivery  at  the  date. 

14  It  is  by  no  means  the  universal  practice  of  country  elevators  to 
hedge.    And  elevators  may  hedge  only  a  part  of  their  purchases,  and 
speculate  with  the  others.    Often  grain  is  sold  as  soon  as  it  is  pur- 
chased.   But  the  need  to  hedge  is  not  eliminated.    It  is  simply  shifted 
to  the  new  buyer  who  then  bears  the  market  risk.    For  discussion  of 
the  prevalence  of  hedging  among  country  elevators  see  the  Report  of 
the  Federal  Trade  Commission  on  the  Grain  Trade  (1920),  Vol.  I,  pp. 
213-214. 

15  Delivery  will  not  be  due  on  the  future  sale  until  the  future  month 
in  which  the  contract  comes  due  arrives.    The  grain  in  the  elevator's 
hands  is,  however,  commonly  sold  before  that  time  arrives. 


MARKET  RISK 


367 


his  future  sale  is  due.16  An  illustration  of  the  normal  situation 
will  make  this  clear.  The  order  in  which  the  transactions 
occur  is  shown  by  the  numbers  in  parentheses. 


Purchases 

Sales 

(1)    Bought   cash   wheat   Sep- 
tember  30   at                          $1  50 

(2)  Sold-  for    December    de- 
livery September  30  at  $1  52 

(4)    Bought   December   wheat' 
October    10   at                         1  52 

(3)    Sold  -cash   wheat   October 
10.  at  '  .'..  150 

Total  purchases              $3  02 

•                                            

Total    sales    $3.02 

The  dealer  buys  grain  when  the  price  in  the  central  market 
is  $1.50  and  hedges  by  selling  for  future  delivery,  say  Decem- 
ber wheat  at  $1.52.  In  a  few  days  his  grain  is  at  the  market, 
and  it  may  be  that  the  same  prices  prevail.  In  that  case  he 
can  buy  in  his  hedge  at  the  same  future  rate  and  sell  his  grain 
at  the  same  cash  rate  which  prevailed  when  he  made  the 
original  transactions.17  If  prices  have  fluctuated  in  the  mean- 
time, however,  and  the  price  of  cash  grain  has  gone  down, 
the  actual  grain  must  be  sold  at  the  lower  cash  price.  But, 
prices  and  cash  prices  normally  va^y  in  the 


direction,  he  can  buy  in  his  future  at  the  lower  price  likely 
to  prevail  for  futures  and  so  maintain  his  profit.  It  is  such 
a  contingency  which  is  hedged  against.  In  other  words,  noth- 
ing is  made  or  lost  on  the  future  transactions.18  That  is  the 
aim,  for  the  shipper's  profit  is  made  from  his  trading  activities 

16  An  operation  of  this  kind  is  fully  described,  op.  cit.,  pp.  208-213. 

17  As  the  central  market  prices  only  are  used  in  the  illustration  no 
profit  to  the  country  merchant  is  shown.    But  the  price  at  which  he 
buys  from  the  farmer  is  normally  less  than  the  cash  price  in  the  central 
market,  in  this  case  $1.50,  by  the  cost  of  handling  and  shipping  plus 
his  profit. 

18  Some  expense  is  involved,  of  course,  but  it  is  principally  the  brok- 
erage fee  paid  the  elevator's  central  market  representative  for  carrying 
out  the  hedging  operations  on  the  exchange.    There  is  also  danger  of  a 
change  in  the  spread  between  the  cash  and  future  price. 


368 


PRINCIPLES  OF  MARKETING 


at  the  country  market.    A  transaction  carried  out  under  these 
conditions  is  shown  below.19 


Purchases 

Sales 

(1)  Bought  cash  wheat  Sep- 
tember 30  at  $1.50 

(2)  Sold   for  December   de- 
livery September  30  at.  $1.52 

(4)  Bought  December  wheat 
October  10  at                   1  42 

(3)  Sold  cash  wheat  October 
10  at                                    1  40 

Total  purchases                  $292 

Total  sales  $2  92 

Manufacturers  May  Hedge. — Hedging  is  also  practiced  by 
manufacturers.  The  miller  may  buy  wheat  in  September  to 
manufacture  into  flour  to  be  ready  for  sale  in  April.  If  at 
the  time  he  buys  the  grain  he  can  sell  the  flour  for  April 
delivery,  the  contract  of  sale  will  assure  that  profit  will  result 
from  his  manufacturing  operations,  assuming  that  he  sold  at  a 
price  which  would  net  a  profit  on  the  milling  operations. 
Again,  he  may  sell  flour  for  future  delivery,  estimating  the 
costs  on  existing  market  prices.  He  can  then  go  into  the 
market  at  the  same  time  and  buy  wheat  for  future  delivery. 
In  either  of  these  cases  the  profits  are  protected:  in  the  first, 
against  a  fall  in  the  price  of  flour;  in  the  second,  against  a 
rise  in  the  price  of  wheat. 

But  if  the  miller  buys  wheat  in  September  to  manufacture 
into  flour  and  cannot  sell  it  for  future  delivery,20  or  if  he 
sells  flour  for  future  delivery  and  has  not  purchased  the  wheat, 
he  may  hedge  in  the  future  market  by  purchasing  wheat  for 

19  The  terminal  elevator,  also,  usually  sells  its  grain  and  buys  in  its 
hedges  before  the  future  contract  matures. 

20  This  is  the  usual  situation  early  in  the  crop  year.    In  this  country, 
for  example,  grain  moves  east  from  the  growing  areas.    As  it  passes 
through  various  milling  centers  the  mills,  or  merchants,  must  purchase 
enough  grain  to  meet  future  needs — when  grain  is  less  plentiful.    If 
mills  wish  to  be  assured  of  grain  with  particular  characteristics  they 
must  buy  early  or  they  may  be  unable  to  purchase  it  later,  except  at  a 
high  premium.    Because  of  these  facts  most  mills  do  buy  early,  and 
possess  a  large  storage  capacity. 


MARKET  RISK  369 

future  delivery.  Generally  speaking,  the  price  of  flour  fol- 
lows the  price  of  wheat,  so  that  by  the  sale  or  purchase  of 
wheat  for  future  delivery  on  the  basis  of  existing  prices,  any 
important  changes  in  the  price  of  flour  can  be  hedged  against. 
If  the  prices  of  flour  and  wheat  go  down  in  the  meantime,  a 
loss  will  result  to  the  miller  who  has  not  sold  his  flour,  because 
the  wheat  he  bought  at  a  higher  price  will  have  to  be  sold  as 
flour  at  the  reduced  price.  If,  however,  when  wheat  was 
bought  in  the  first  place  a  sale  of  wheat  was  made  for  this 
future  date,  the  grain  to  make  the  delivery  could  now  be 
bought  at  a  lower  price.  But  it  would  be  delivered  at  the 
higher  price  at  which  the  future  was  originally  sold.  The  grain  [j 
on  this  transaction  compensates  for  the  loss  on  the  wheat  made  J 
into  flour.  When  the  miller  sells  flour  but  does  not  possess  the 
wheat  he  may  protect  himself  by  buying  wheat  for  future  de- 
livery.21 By  these  transactions  loss  is  minimized.  But  simi- 
larly, of  course,  any  speculative  gain  that  might  have  resulted 
from  the  original  purchases  or  sales  will  likewise  be  eliminated. 
In  other  words,  the  miller  will  make  only  his  manufactur- 
ing profit;  no  speculative  profit  or  loss  of  importance  will 
result. 

Cotton  manufacturers  sometimes  buy  cotton  from  merchants 
before  the  crop  has  matured,  and  the  merchant  may  in  turn 
buy  it  from  other  dealers,  simply  taking  a  trade  profit  for  his 
activity  in  caring  for  the  manufacturer  while  shifting  the 
actual  speculation  to  the  other  dealer.  And  manufacturers 
in  a  number  of  lines  may  to  some  degree  avoid  risks  in  their 
market  by  buying  and  selling  for  future  delivery  raw  materials 
which  they  plan  to  use. 

Other  Benefits  from  Hedging. — Even  the  farmer  benefits 
greatly  from  hedging,  although  he  does  not  usually  take  an 

31  The  miller  will  probably  not  use  the  actual  wheat  purchased,  for  it 
may  not  prove  to  be  of  the  quality  desired.  He  will  go  into  the  market 
and  get  the  quality  he  wishes  and  sell  the  future  previously  purchased. 
The  loss  or  gain  on  the  one  transaction  thus  tends  to  counteract  the 
loss  or  gain  on  the  other. 


370  PRINCIPLES  OF  MARKETING 

r 

active  part  in  it.22  Vlt  is  evident  that  without  hedging,  grain, 
for  example,  could  not  be  dumped  on  the  market  by  the  farmer 
in  so  short  a  time  as  it  is  without  enormous  risks  being  run 
by  those  who  buy  ^/.  When  buyers  cannot  adequately  hedge 
against  price  declines,  they  have  to  discount  the  possible  loss 
from  price  changes  in  order  to  cover  the  larger  risk  they  bear. 
They  cannot  bear  the1  risks  without  a  wide  margin  between  the 
price  they  pay  the  grower  and  the  price  which  prevails  in 
their  selling  market. 

Financing  is  rendered  safer  when  crops  can  be  hedged. 
Bankers  hesitate  to  finance  speculative  undertakings  and  con- 
sequently will  not  loan  a  large  percentage  of  the  present  mar- 
ket value  on  unhedged  crops.  Bankers  in  central  markets  in 
particular  often  require  merchants  to  whom  they  loan  to  hedge 
their  transactions  when  that  is  possible."8 

All  Risk  is  not  Eliminated. — It  must  not  be  assumed,  how- 
ever, that  hedging  removes  all  danger  of  loss.  As  the  delivery 
month  approaches  the  tendency  is  for  the  cash  price  and  the 
future  price  for  that  month  to  approach  each  other.  In  other 
words  the  "spread"  between  the  cash  price  and  the  future 

22  Boyle  states  that  in  August,  1919,  when  the  price  of  corn  began  to 
fall  many  large  farmers,  assured  of  their  crop,  sold  it  for  future  deliv- 
ery.    In  this  way  they  protected  themselves  against  any  further  drop 
in  price  which  might  take  place  before  their  own  crop  was  harvested. 
See  J.  E.  Boyle,  Speculation  and  the  Chicago  Board  of  Trade,  p.  36. 

23  "The  millers  and  the  grain  men,  buying  .  .  .  much  larger  quantities 
of  grain  than  they  require  for  their  immediate  purposes,  are  compelled 
to  borrow  money  entirely  out  of  all  proportion  to  the  amount  of  capital 
which  they  have  invested  in  their  business.    These  loans  are  sometimes 
secured  by  warehouse  receipts  for  grain,  but  as  the  price  of  grain  may 
decline   very   sharply   and   suddenly,   the   conservative   banker   cannot 
depend  entirely  upon  the  grain  as  security,  but  must  insist  that  the 
borrower  hedge  his  purchases,  either  through  the  sale  of  flour  or  the 
selling  of  futures  on  one  of  the  grain  exchanges,  thus  insuring  both  the 
borrower  and  the  banker  against  severe  fluctuations  in  the  value  of  the 
grain."     This  is  a  paragraph  from  a  letter  written  by  Mr.  F.  O.  Wet- 
more,  President  of  the  First  National  Bank  of  Chicago,  and  printed  for 
the  Chicago  Board  of  Trade. 


MARKET  RISK 


371 


price  tends  to  narrow.    Now  when  the  hedging  transaction  / 
compels  the  operator  to  go  into  the  market  to  buy  or  sell,  a  I 
slight  variation  in  this  spread  may  cause  him  to  lose  or  gain,  \ 
as  the  case  may  be.     This  can  be  illustrated  in  the  case  of  the 
country  elevator.     Suppose  it  buys  on  a  $1.50  basis  and  sells 
its  future  on  a  $1.57  basis,  and  that  when  the  wheat  gets  to 
market  the  cash  price  has  gone  up  to  $1.53  and  the  future  to 


Purchases 

Sales 

(1)  Bought  cash  wheat  Sep- 
tember 30  at                   $1  50 

(2)  Sold    May    wheat    Sep- 
tember 30  at 

$157 

(4)  Bought  May  wheat  Oc- 
tober 30  at       1  60. 

(3)  Sold  cash  wheaf  October 
30  at   

153 

Total    $3.10 

Total  

$310 

Gain  or  Loss  

$  .00 

$1.60.  No  gain  or  loss  is  evident.  But  suppose  that  in  the 
meantime  the  spread  narrows;  it  is  then  evident  that,  as  a 
result,  a  gain  has  accrued.  This  is,  of  course,  the  normal 


Purchases 

Sales 

(1)  Bought  cash  wheat  Sep- 
tember 30  at  $1  50 

(2)  Sold    May    wheat    Sep- 
tember 30  at 

$157 

(4)  Bought  May  wheat  Oc- 
tober 30  at  1  .56 

(3)  Sold  cash  wheat  October 
30  at                  ... 

150 

Total    $306 

Total 

$307 

Gain   

$  .01 

result,  since  cash  and  future  prices  tend_tQ_cgnyerge_sis Lfuture  \ 
months  draw  nearer.  Although  the  change  in  the  spread 
would  theoretically  be  small  in  the  short  period  of  time  nor- 
mally elapsing  before  the  grain  reaches  the  market,  it  may 
actually  be  very  great,  and  may  either  increase  or  decrease. 
Had  the  spread  widened  a  loss  would  have  resulted,  as  is  shown 
on  page  372.  Bu^  such  losses  are  usually  relatively  small, 
and  unless  prices  are  greatly  "out  of  line"  they  are  not  to  be 


372 


PRINCIPLES  OF  MARKETING 


Purchases 

Sales 

(1)  Bought  cash  wheat  Sep- 
tember 30  at  $1.50 

(2)  Sold    May    wheat    Sep- 
tember 30  at  

$1.57 

(4)  Bought  May  wheat  Oc- 
tober 30  at                        1  58 

(3)  Sold  cash  wheat  October 
30  at 

150' 

Total  $308 

Total  

$307 

Loss  

$  .01 

compared  with  the  risk  of  loss  through  changes  in  prices  when 
no  hedge  is  made.24  Terminal  elevators  sometimes  increase 
their  profit  by  buying  in  their  hedge  at  times  when  the  spread 
narrows  more  than  is  normal.  This  will  increase  their  profits, 
because,  as  it  will  be  remembered,  the  spread  at  the  time  they 
bought  cash  wheat  and  sold  it  for  future  delivery  was  enough 
to  cover  the  costs  of  carrying  it  in  addition  to  some  profit. 
And  so,  if  the  spread  at  the  time  of  sale  has  narrowed  more 
than  the  normal  amount,  the  profit  is  increased  by  so  much. 
They  can  buy  again  when  the  spread  becomes  normal. 

Speculation. — Hedging  is  most  successfully  carried  on  in 
the  sale  of  products  which  are  traded  upon  exchanges  organized 
for  future  dealing.  On  such  markets  the  play  of  demand  and 
supply  tends  to  keep  the  spreads  between  markets  and  between 
present  and  future  prices  normal,  that  is,  at  an  amount  just 
sufficient  to  cover  the  cost  of  carrying  the  product  to  the  future 
time,  or  from  market  to  market.  It  seems,  furtheriacrreT  that 

'  ^ 1 ^""^ 


tion,  that  is,  on  buying  and  selling  which  are  donlfonly  for  the 
purpose  of  making  a  speculative  as  opposed  to  a  trade  profit. 
It  is  asserted  that  such  speculation  on  the  exchanges  cannot  be 
prohibited  without  making  impossible  the  most  efficient  hedg- 
ing. There  is  much  difficulty,  for  example,  in  learning  who  is 
speculating.  In  a  given  trade  both  parties  may  be  speculat- 

24  During  the  spring  of  1920,  however,  largely  because  of  transporta- 
tion congestion,  the  cash  price  was  often  higher  than  the  future  price, 
and  delivery  was  so  uncertain-  that  hedging  could  not  be  so  readily 
and  safely  indulged  in.  See  Report  oj  the  Federal  Trade  Commission 
on  Wheat  Prices  for  the  1920  Crop,  pp.  52-59. 


MARKET  RISK  373 

ing,  or  only  one  may  be  speculating,  or  neither  may  be  specu- 
lating. Furthermore,  if  speculative  trading  were  prohibited  it 
is  likely  that  the  future  market  would  be  far  less^efficient 
than  it  is  now.  For  seldom  do  the  desires  of  "real"  buyers 
and  sellers  coincide.  Thus  terminal  elevators,  which  are 
"legitimate"  sellers,  might  be  selling  heavily  at  certain  seasons, 
whereas  millers,  who  are  "legitimate"  buyers,  are  assumed  to 
buy  more  or  less  uniformly  throughout  the  year.25  A  large 
part  of  the  grain  crop  is  sold  by  growers  in  the  fall.  And  if 
there  were  no  speculators  the  natural  tendency  would  be  for 
prices  to  drop  very  low  at  thatj^ime.26  Buyers  would  be  un- 
willing, furthermore,  to  buy  the  grain  without  taking  out  a 
larger  margin  than  they  do.  But  when  there  are  speculators 
in  the  market  there  is  a  chance  to  hedge.  If  prices  tend  to 
decline,  someone  begins  to  buy  as  a  speculation.  Such  buy- 
ing tends  to  check  the  decline,  and  thereby  to  steady  tl|e 
price,  unless  the  judgment  of  an  effective  number  of  traders 
indicates  that  the  price  is  still  higher  than  conditions  war- 
rant. If  prices  go  up,  those  who  have  been  holding  to  sell 
at  a  higher  price  begin  to  sell  and  the  rise  is  checked.  If 
prices  go  down  and  speculators  truly  anticipate  an  advance, 
the  purchases  of  speculators  tend  to  increase  prices  and  so 
to  curtail  present  consumption,  thus  leaving  a  larger  supply  for 
the  future.27  But  if  the  supply  is  large  the  action  of  -specu- 
lators in  selling  or  in  keeping  out  of  the  market  forces  prices 

35  They  do  not  appear  to  do  so,  however,  if  we  may  judge  from  the 
great  variations  in  their  weekly  outputs.  See  James  E.  Boyle,  The 
Law  of  Supply  and  Demand  and  the  Wheat  Market  (1921),  p.  34. 

88  It  is  commonly  assumed  that  grain  prices  are  depressed  in  the  fall, 
but  impartial  studies  do  not  entirely  bear  out  that  assumption.  See,  for 
example,  J.  E.  Pope,  "Can  the  Farmer  Realize  Higher  Prices  for  His 
Crops  by  Holding  Them?"  Quarterly  Journal  of  Economics,  Vol.  XXX 
(1916),  pp.  805-831. 

27  Another  type  of  speculation  arises  from  watching  prices  in  all  mar- 
kets, and  involves  the  purchase  and  sale  of  merchandise  in  markets 
which  are  not  "in  line."  This  tends  to  bring  them  back  into  line  and 
so  to  keep  the  national  and  international  markets  "in  line." 


374  PRINCIPLES  OF  MARKETING 

down.     In  this  manner  consumption  is  encouraged  and  a  glut 
in  the  market  at  a  later  time  is  avoided. 

Effect  on  Prices. — It  is  often  assumed  that  because  grain 
and  other  products  dealt  in  on  the  exchanges  change  hands 
many  times  there  results  a  great  deal  of  duplication  of  effort 
and  of  useless  handling.28  It  is  further  assumed,  sometimes, 
that  "everyone  takes  out  a  profit."  But  a  consideration  of 
the  nature  of  future  trading  will  show  that  this  assumption 
is  false.  There  is  no  direct  cost  over  the  brokerage  fee,  now 
one-quarter  cent  per  bushel  on  the  Chicago  Board  of  Trade. 
Many  transactions  are  offset  by  other  transactions  and  are 
canceled  through  the  machinery  of  the  exchanges.  In  such 
cases  the  actual  transfer  of  title  does  not  take  place.  Delivery 
\-  consists  in  the  delivery  of  a  warehouse  receipt.  Consequently, 
physical  handling  does  not  occur  unless  a  real  manufacturing 
or  trade  need  causes  the  removal  of  the  product  from  ware- 
house to  factory,  or  from  one  city  to  another.  Most  of  the 
future  transactions  simply  change  the  ownership  of  the  grain. 
Furthermore,  in  regard  to  the  second  point,  prices  cannot  be 
definitely  shifted  up  or  down  for  any  period  of  time  as  a  result 
of  the  activities  on  the  exchange.  For  the  factors  that  ulti- 
mately determine  the  price  of  the  product  rest  on  fundamental 
conditions  of  demand  and  supply  outside  the  exchange  itself. 
The  average  speculative  purchase  or  sale  on  the  exchange  is 
based  on  the  estimated  trend  of  prices  and  of  itself  has  no  more 

28  The  Federal  Trade  Commission  estimates  that  the  average  annual 
volume  of  future  trading  in  the  principal  cereals  since  1884  has  ranged 
from  16,000,000,000  to  23,600,000,000  bushels.  Most  of  these  sales  were 
on  the  Chicago  Board  of  Trade.  In  recent  years  the  average  crop  of 
wheat,  the  principal  grain  sold  on  future  contracts,  has  ranged  from 
two-thirds  to  a  billion  bushels  per  annum,  and  the  corn  crop  has  been 
around  one  billion.  In  view  of  the  increased  size  of  the  crops  (the 
wheat  crop  was  498,550,000  bushels  in  1880  and  1,025,801,000  in  1915), 
it  is  evident  that  future  trading  is  relatively  less  important  than 
formerly.  Thus,  for  the  period  1884-1888  the  average  annual  future 
sales  were  23,600,000,000  bushels;  for  1914-1918  they  were  19,400,000,000 
bushels.  See  Report  of  the  Federal  Trade  Commission  on  the  Grain 
Trade  (1920),  Vol.  V,  p.  42. 


MARKET  RISK  375 

than  a  temporary  effect  thereon.  If  many  sales  of  a  given  lot 
of  grain  occur  on  a  rising  market,  it  is  true  that  each  successive 
seller  will  make  a  speculative  profit.  But  if  the  owner  of  an- 
other lot  of  grain  held  it  until  the  peak  was  reached  and  then 
sold,  he  would  reap  the  full  profit  which  was  divided  among 
the  several  owners  of  the  first  lot.  The  effect  in  the  last  case, 
furthermore,  would  be  to  force  the  price  up — since  grain  was 
held  off  the  market — whereas  the  effect  of  the  several  succes- 
sive sales  in  the  former  case  might  check  the  rise,  because 
many  buyers  would  have  purchased  at  the  lower  prices.  As 
prices  rose,  consequently,  the  buying  side  would  be  less  im- 
portant and  less  prone  to  become  fearful  lest  they  be  unable 
to  obtain  supplies.  And  so  less  pressure  would  be  exerted 
on  the  buying  side. 

The  case  is  made  more  evident  when  a  falling  market  is 
considered.  Then  each  successive  seller  takes  a  loss,  not  a 
profit.  The  fact,  besides,  that  there  is  a  constant  market 
for  futures  enables  a  holder  to  sell  quickly  on  a  decline  and  so 
to  shift  the  risk.  This  makes  it  possible  to  prevent  large  in- 
dividual losses. 

Evils  of  Speculation. — No  discussion  of  speculation  is  com- 
plete without  mention  of  the  recognized  evils  which  accom- 
pany it.29  In  brief,  the  commonly  recognized  evils  are: 

1.  Trading  by  inexperienced  persons. 

2.  Trading  with  insufficient  capital. 

3.  Manipulation  of  prices. 

(1)  Trading  by  inexperienced  persons  usually  brings  unfor- 
tunate consequences  to  them.  Their  lack  of  knowledge  keeps 

29  The  reader  is  referred  to  the  special  treatises  mentioned  on  p.  362 
for  detailed  discussion  of  these  points.  It  should  be  remembered  that 
these  evils  of  speculation  are  true  of  all  speculation.  They  tend  to  be 
minimized  on  organized  exchanges — because  rules  of  the  exchange  are 
made  to  reduce  them.  On  the  other  hand,  some  contend  that  the  pres- 
ence of  an  exchange  leads  many  people  to  speculate  who  would  not 
otherwise  do  so. 


376  PRINCIPLES  OF  MARKETING 

them  from  forecasting  the  market  properly,  and  in  the  end  gen- 
erally leads  to  heavy  losses  which  they  are  unable  to  recoup. 
But  such  trading  may  have  an  unfortunate  effect  on  the  mar- 
ket, as  the  transactions  of  the  inexperienced  "lamb"  who  does 
not  properly  forecast  the  market  may  force  the  price  away 
from  the  normal  trend. 

(2)  The  danger  from  trading  on  inadequate  capital  lies  in 
the  loss  it  may  cause  innocent  traders  who  have  made  future 
contracts  with  a  defaulting  party.  If,  for  example,  a  speculator 
has  sold  for  future  delivery  and  cannot  deliver  because  prices 
have  risen  above  his  ability  to  buy,  he  may  cause  failure  to 
other  persons  who  had  depended  on  that  trade.     In  many  or- 
ganized exchanges  this  danger  is  guarded  against  by  forcing 
traders  to  keep  a  deposit  with  the  exchange,  which  must  be 
kept  large  enough  to  cover  any  differences  between  the  price 
at  which  they  have  bargained  to  deliver  or  to  accrpt  futur^fe 
and^the  current  price  of  the  futures  in  the  market.    Individual 
brokers  may  also,  in  the  absence  of  compulsion  by  the  ex- 
change, call  on  traders  whom  they  represent  to  protect  their 
transactions  by  margins.30 

(3)  There  are  two  common  means  of  manipulating  a  future 
market.     One  is  to  send  out  false  news  of  market  conditions. 
The  other  is  to  carry  on  operations  opposed  to  the  correct  trend 
of  the  market.     By  such  means  it  .is  hoped  to  stampede  the 
market  in  the  wrong  direction  so  that  when  the  normal  forces 
do  begin  to  function  the  manipulators  can  gain  a  larger  profit. 
For  example,  by  selling,  prices  may  be  forced  down.     If  the 
normal  trend  is  upward,  the  manipulators  may  buy  at  the. 
lower  price  and  hold  for  the  high  price  which  follows.    Again, 
with  many  persons  "short"  in  the  market,  i.  e.,  having  sold  for 
future  delivery  goods  they  have  not  yet  purchased,  a  large  part 
of  the  available  supply  may  be  "cornered,"  i.  e.,  held  by  one 
person  or  a  small  group  who  will  not  sell,  so  that  the  "shorts". 

30  The  various  means  by  which  exchanges  and  individual  traders  guard 
against  this  danger  are  described  in  the  Report  of  the  Federal  Trade 
Commission  on  the  Grain  Trade,  Vol.  V,  pp.  155-167,  229-232. 


MARKET  RISK  377 

will  have  to  pay  a  high  price  to  those  who  control  the  supply 
in  order  to  get  goods  with  which  to  meet  their  contracts.31 

The  problem  of  organized  speculation  is  to  remove  these 
evils  and  yet  to  keep  the  benefits  of  the  system.  The  danger 
of  regulation  is  that  in  eliminating  the  evils  the  benefits  will 
be  lost.  Much  has  been  done,  nevertheless,  by  exchanges  to 
reduce  these  evils,  and  much  is  being  done.  Frequent  legis- 
lative investigations  and  propaganda  against  the  exchanges 
have  had  a  salutary  effect.  Many  of  the  proposals  for  abolish- 
ing or  regulating  the  exchanges  are  of  themselves  impractical 
and  undesirable.  But  they  have  caused  the  exchanges  to  re- 
vise their  rules,  when  that  is  feasible,  as  well  as  to  bring  pres- 
sure on  individual  members  to  curtail  obnoxious  practices. 

Insurance. — Other  risks  which  are  encountered  in  the  mar- 
keting of  merchandise  were  mentioned  earlier  in  this  chapter. 
An  important  means  of  avoiding  many  of  those  risks  is  through 
insurance.  Insurance  does  not  eliniinntr?— H^fr  It  produces 

e  who  suffers  a  loss  does  not  bear  it 
in  its  entirety ;  a  large  number  cooperate  in  carrying  it.  Each 
pays  a  proportionate  share  of  the  amount  which  will  cover 
the  losses  likely  to  occur  in  the  whole  group.  Only  a  few  will 
lose,  but  those  few  are  protected  against  excessive  loss.  Since 
any  one  of  the  group  may  suffer  loss,  each  is  willing  to 
pay  into  the  common  fund  (the  insurance  company)  to  avoid 
loss  in  case  he  should  be  one  of  those  to  suffer.  The  main 
effect  of  insurance  is,  then,  to  relieve  those  insured  from  a 
part  of  the  risk  burden  they  otherwise  bear  alone,  a  privilege 
for  which  they  are  willing  to  pay.  Insurance  is  very  im- 
portant to  small  producers  whose  activities  are  not  broad 
enough  or  large  enough  to  make  their  risks  relatively  con- 
stant. Thus  a  retail  dealer  or  a  small  factory  may  lose 
everything  through  a  fire  or  flood,  whereas  a  great  combina- 
tion with  many  buildings  and  plants  in  scattered  parts  of  a 
country  is  not  likely  to  suffer  many  such  losses  in  any  given 

31  This  has  been  rendered  practically  impossible  by  the  Chicago  Board 
of  Trade  and  by  other  large  grain  exchanges,  op.  cit.,  pp.  175-182. 


378  PRINCIPLES  OF  MARKETING 

time.  Its  danger  of  excessive  loss  is  relatively  much  lighter. 
Both  individual  and  society  would  suffer  if  the  small  but  ef- 
ficient merchant  or  manufacturer  were  left  destitute  from  an 
unforeseen  catastrophe.  But  through  insurance  he  is  saved 
from  such  a  fate,  and  may  return  to  his  business.  Among  the 
risks  whch  may  be  insured  against  are  the  following:  fire, 
cyclone,  death,  accident,  disease,  burglary,  violation  of  trust, 
and  bad  debts. 

Insurance  is  of  importance  to  all  who  are  engaged  in  mar- 
keting. It  is  an  important  factor  in  eliminating  uncertainty, 
and  so  in  making  the  market  machinery  perform  more  smoothly 
and  at  a  reduced  cost.  This  is  well  illustrated  in  connection 
with  financing.  When  a  bank  makes  a  loan  on  combustible 
merchandise  in  storage  or  in  transit,  it  usually  insists  that  the 
merchandise  be  insured  against  loss  from  fire.  Otherwise  the 
risk  to  the  owner  of  the  goods,  and  hence  to  the  bank  which 
has  loaned  him  money,  is  too  great  to  warrant  a  loan.  When 
goods  are  shipped  by  water  the  dangers  of  loss  at  sea  are 
provided  for  by  means  of  marine  insurance.32  By  means  of  in- 
surance, likewise,  risk  of  loss  from  bad  debts,  theft,  and 
defalcation  may  be  guarded  against.  All  of  this  tends  to 
remove  uncertainty  and  so  to  reduce  the  ultimate  cost  of 
marketing. 

Conclusion. — Although  some  risks  can  be  insured  and  others 
can  be  hedged,  there  are  many  business  risks  which  have  to 
be  borne  by  business  men  (entrepreneurs)  which  cannot  be 
profitably  shifted.  In  directing  industry,  the  entrepreneur 
borrows  capital,  employs  labor,  and  buys  materials.  He  agrees 
to  pay  for  all  of  these,  whether  he  is  able  to  sell  the  resulting 
product  or  service  at  a  profit  to  himself  or  not.  Of  course, 
those  who  furnish  capital,  labor,  and  materials  may  also  lose, 
but  not  until  the  law  is  satisfied  that  the  business  man  has 
paid  to  the  full  extent  of  his  ability.33  Just  so  long  as  he  is 

3aA  marine  insurance  certificate  is  one  of  the  documents  which,  along 

with  the  bill  of  lading,  accompanies  drafts  drawn  on  foreign  customers. 

33  The    limited    liability    features    of   modern    business    organizations 


MARKET  RISK  379 

able  to  pay,  it  is  the  business  man  who  bears  the  risks  of  busi- 
ness. He  is  willing  to  bear  this  risk  because  the  expected 
profit  is  a  sufficient  inducement  to  counteract  the  chance  of 
loss.  Such  risk,  consequently,  as  cannot  be  eliminated  or 
profitably  shifted  is  borne  by  entrepreneurs.  Even  risk  which 
is  shifted,  unless  it  is  offset  by  a  contract  of  an  opposing  char- 
acter, such  as  the  hedge,  must  be  borne  by  the  one  to  whom  it 
is  shifted.  In  the  end  all  the  losses  which  result  from  market 
risks  must  be  borne  by  some  one.  But  by  the  means  which 
have  been  discussed  many  of  these  risks  are  removed  or  mini- 
mized and  still  others  are  divided. 

modify  this  to  a  degree,  so  far  as  individual  members  of  a  corporation 
are  concerned. 


CHAPTER  XVIII 
MARKET  NEWS 


The  significance  of  adequate  market  news  and  of  the  stand- 
ardization of  products  in  effective  marketing  has  been 'sug- 
gested from  time  to  time  in  previous  chapters.  This  and  the 
following  chapter  include  a  more  thorough  consideration  of 
these  points.  The  two  subjects  are  closely  related.  Each  is 
important  in  the  establishment  of  market  price  and  in  increas- 
ing the  ease  with  which  the  transfer  of  title  can  be  accom- 
plished. The  full  usefulness  of  neither,  moreover,  is  possible 
without  a  proper  development  of  the  other. 

Importance  of  Market  News. — Market  news  is  a  pervasive 
element  in  marketing.  It  is  the  determining  factor  in  estab- 
lishing market  price.1  If  the  collection,  interpretation, 
and  circulation  of  market  news  could  be  so  perfected  as 
to  make  absolutely  accurate  prevision  possible,  market  risk 
would  disappear.2  By  minimizing  risk,  market  news  makes 
the  problems  involved  in  market  finance  less  difficult  of  solu- 
tion; loans  can  be  given  and  credit  extended  on  sales  with 
greater  certainty  of  normal  payments  being  made,  and  in- 
vestment in  stocks  and  in  sales  campaigns  is  likewise  attended 
with  less  risk. 

It  is  assumed  by  the  apologist  for  the  competitive  regime 
that  the  forces  of  demand  and  supply  tend  constantly  toward 
an  equilibrium.  But  as  markets  grow  in  size  and  complexity, 
as  roundabout  methods  of  production  involving  months  and 

aSee  Chap.  XXI. 
2  See  pp.  356-357. 

380 


MARKET  NEWS  381 

years  of  time  are  more  extensively  employed,  and  as  the  neces- 
sary investment  in  fixed  plant  increases  in  relative  amount, 
conditions  arise  which  make  it  necessary  that  information  con- 
cerning demand  and  supply  be  carefully  collected,  interpreted, 
and  dispersed,  if  this  equilibrium  is  to  be  in  any  measure 
realized.  It  is  the  presence  of  these  conditions  in  modern 
industry,  together  with  the  lack  of  sufficient  market  informa- 
tion, that  is  a  frequent  cause  for  individual  failure  on  the 
part  of  business  men,  just  as  it  is  a  common  cause  of  alter- 
nating high  and  low  prices  for  individual  commodities. 

Problems  Arising  from  Inadequate  News. — An  adequate 
market  news  service  prevents  much  waste  in  marketing,  waste 
which  is  of  great  importance  to  the  common  welfare  as  well 
as  to  those  most  directly  concerned  in  individual  transac- 
tions. The  most  obvious  waste  from  inadequate  market  news 
is  found  in  the  market  for  perishable  foods,  more  especially 
fruits  and  vegetables.  These  products  are  grown  by  numer- 
ous producers,  frequently  scattered  over  a  large  territory, 
and  in  widely  separated  producing  areas.  If  too  great  a  sup- 
ply reaches  a  given  market,  prices  will  drop,  and  it  may  not 
even  pay  to  market  some  of  it.  At  best  a  low  price  will 
prevail,  and  the  goods  must  be  sold  at  this  price  or  shipp.ed 
on  to  other  markets.  This  is  impossible  with  the  more  highly 
perishable  commodities,  and  great  deterioration  occurs  with 
many  others.  The  roundabout  shipment  and  sale  also  cause 
additional  costs  to  be  incurred.  And  when  prices  are  forced 
down  in  the  one  market,  consumers  depending  on  other  markets 
where  the  surplus  might  have  gone,  may  be  forced  to  pay  high 
prices  because  the  supply  there  is  small.3 

Again,  knowledge  of  the  nature  of  even  the  more  stable  con- 
ditions of  demand  for  perishables  is  often  lacking.  Some  con- 
suming markets  favor  white  eggs  and  brown  eggs  must  be 
sold  at  a  discount.  Other  markets  have  the  opposite  prefer- 
ence. Green  asparagus  is  demanded  at  some  points,  white  in 
others.  The  baskets,  crates,  and  other  containers  in  favor  in 

3  This  has  an  important  effect  on  prices  and  risk.    See  pp.  57-58. 


382  PRINCIPLES  OF  MARKETING 

markets  also  vary,  and  a  product  packaged  for  one  market 
must  sometimes  be. repackaged  or  sold  at  a  discount  in  others.4 

Market  News  and  Business  Policies. — In  all  industries  a 
knowledge,  or  a  forecast,  of  future  market  conditions,  as  well 
as  of  day  to  day  developments,  is  important.  All  production 
is  for  the  future;  and,  consequently,  producers  establish  pro- 
duction policies  on  their  judgment  of  future  markets; 
merchants  determine  purchase  policies  on  their  judgment  of 
future  markets;  and  traders  on  speculative  exchanges,  like- 
wise, base  their  transactions  on  forecasts  of  the  market.  The 
more  elastic  the  demand  for  a  product  the  greater  is  the  need 
for  a  proper  estimate,  for  production  must  usually  begin  long 
before  sales  are  possible,  and  large  stocks  must  often  be  ac- 
cumulated before  the  market  forces  are  definitely  in  opera- 
tion. 

The  Market  Forecast. — A  proper  forecast  of  the  market 
for  either  the  immediate  or  the  distant  future  is  dependent 
in  the  first  instance  upon  a  full  knowledge  of  the  pertinent 
conditions  which  bear  on  demand  and  supply,  and  on  the 
timeliness  with  which  these  facts  are  ascertained.  Then, 
with  the  data  at  hand,  the  accuracy  of  the  forecast  depends 
upon  the  skill  with  which  they  are  interpreted. 

Both  the  volume  of  products  which  may  reach  the  market 
arid  the  intensity  of  demand  become  more  and  more  uncertain 
as  forecasts  extend  further  and  further  into  the  future.  The 
activities  of  other  producers,  changes  in  technique,  weather 
conditions,  general  and  special  business  conditions,  the  reaction 
of  consumers  to  products  and  prices — these  and  many  other 
conditions  are  variable.  They  are  difficult  to  determine  for 
the  immediate  future;  and  as  the  time  for  which  they  are 
to  be  forecasted  increases,  the  difficulty  of  prediction  grows 
greater. 

The  speed  with  which  the  knowledge  of  conditions  is  dis- 
seminated to  interested  parties  varies  greatly.  This  is  ex- 

4  See  G.  K.  Holmes,  "Consumers'  Fancies,"  U.  S.  Department  of  Agri- 
culture, Year  Book,  1904. 


MARKET  NEWS  383 

tremely  important,  for  those  who  first  possess  knowledge  of 
significant  conditions  thereby  gain  great  advantages.5  It  is 
on  account  of  the  importance  of  the  time  element  that  large 
business  concerns,  especially  those  operating  in  speculative 
future  markets,  often  have  elaborate  agencies  for  gathering 
market  news,  as,  for  example,  leased  telegraph  wires  with 
which  to  obtain  and  distribute  the  news  quickly,  and  secretly.6 
In  contrast  with  these  are  the  smaller  operators,  farmers, 
manufacturers,  merchants,  and  the  final  consumer,  most  of 
whom  are  almost  entirely  dependent  on  outside,  and  often 
prejudiced,  sources  of  information. 

Interpretation  of  Market  News. — The  value  of  market 
news  depends^  finally,  not  only  on^jthe  accuracy  and  com- 
pleteness with  which  it  is  gathered  andC^he  speed  with  which 
it  is  disseminated,  but  also  upor(yf;he  skill  with  which  it  is 
interpreted.  No  matter  how  much  information  is  available  it 

•^ ^••^•^••^•••fc* 

is  valueless  until  interpreted;  and  upon  the  skill  with  which 
he  interprets  the  data  at  hand  depends  in  large  degree  the 
business  success  of  the  trader  and  even  of  the  producer.  For 

5  "Of  market  news,  time  is  the  essence.  For,  in  the  bargaining  process 
superior  knowledge  may  be  secured  in  two  ways;  it  may  be  a  broader, 
sounder,  more  comprehensive  knowledge,  or  it  may  be  an  earlier 
knowledge.  As  a  market  becomes  more  and  more  thoroughly  organ- 
ized, competition  in  knowledge  tends  to  be  narrowed  to  securing  an 
earlier  knowledge.  A  marvelously  efficient  organization  has  been  devel- 
oped as  a  result  of  this  sort  of  rivalry,  and  has  concentrated  itself  in 
the  organized  exchanges.  As  has  been  shown  already,  the  activity  most 
frequently  associated  with  organized  exchanges  is  dealing  in  'futures,' 
and  to  deal  intelligently  there  must  be  a  broad  and  sound  basis  of 
knowledge.  The  very  sensitiveness  of  exchange  prices  is  due  to  their 
immediate  response  to  market  news.  .  .  . 

"Knowledge  of  facts,  then,  that  can  be  judged  on  a  price  basis  is 
market  information." — C.  S.  Duncan,  Marketing:  Its  Problems  and 
Methods  (1920),  pp.  206-207. 

8  One  member  of  the  Chicago  Board  of  Trade  has  23,239  miles  of 
leased  lines  in  its  private  wire  system.  See  Report  oj  the  Federal  Trade 
Commission  on  the  Grain  Trade,  Vol.  V,  p.  111.  Forty-eight  other 
members  operated  private  wires  in  1919. — James  E.  Boyle,  Speculation 
and  the  Chicago  Board  oj  Trade,  pp.  17,  217-218. 


384  PRINCIPLES  OF  MARKETING 

from  that  interpretation  business  policies  are  determined  and 
plans  are  formulated.  Here,  wide  variations  are  found  among 
business  men.  Many  depend  on  rumors  and  "hum-hes."  But 
some  spend  large  sums  in  gathering  news  and  putting  it  in 
form  so  that  the  executives  can  most  readily  and  accurately 
interpret  it.7  Successful  speculation,  in  particular,  depends 
upon  prompt  and  accurate  collection  and  interpretation  of 
.market  news.  But  to  all  business  timely  hews  which  is 
quickly  and  accurately  interpreted  is  essential. 

II 

Sources  of  Market  News. — Our  National  Government 
offers  what  is  by  far  the  largest  single  source  of  market 
information  in  this  country,  through  thi^annual  and  special 
reports  of  its  many  bureaus  and  departments.8  Yet  another 
important  source  of  information  is  the^fata  compiled  by  busi- 
ness men  in  their  own  offices:  from  material  obtained  by 
governmental  bodies  and  other  agencies,  from  the  records 
of  the  business,  and  from  the  experiences  of  their  own  staff. 
Furthermore,  special  investigations  for  the  purpose  of  secur- 
ing information  not  otherwise  available,  areS'now  made  for 
business  houses  by  their  own  staffs  or  by  outside  agencies. 
Somewhat  similar  to  this  is  the  information  collected  by  trade 
associations  from  their  members.  Large  banks,  likewise,  have 
departments  for  gathering  and  interpreting  market  news  which 
will  be  of  assistance  to  their  officers  and  clients.  Finally, 
there  are  private  agencies,  such  as  the  market  reporters  of 
the  agricultural  markets,  representatives  of  the  public  press, 
research  departments  of  educational  institutions,  and  private 
research  and  statistical  agencies. 

T  See  Horace  Secrist,  Statistics  in  Business  (1920) ;  L.  D.  H.  Weld,  "A 
Strong  Foundation  for  Your  Advertising,"  Printers'  Ink,  Jan.  9,  1919, 
pp.  3-12;  C.  S.  Duncan,  Commercial  Research  (1919);  J.  G.  Frederick, 
Business  Research  and  Statistics  (1920);  and  Percival  White,  Market 
Analysis  (1921). 

"See  W.  I.  Swanson,  Guide  to  U.  S.  Government  Publications,  Bul- 
letin No.  2,  U.  S.  Bureau  of  Education  (1918). 


MARKET  NEWS  385 

Dissemination  of  Market  News. — The  most  familiar  me- 
dium for  the  dissemination  of  market  news  is  the  public  press. 
The  advertising  pages  of  magazines  and  newspapers  are 
utilized  entirely  in  giving  such  information,  especially  that 
concerning  the  supply  of  specific  products  and  services.  News- 
papers and  trade  journals  quote  the  prevailing  prices  for  raw 
materials  and  foods — live  stock,  grain,  wool,  vegetables,  and 
fruits — for  many  manufactured  products,  and  for  stocks  and 
bonds.  News  articles  give  general  information  of  market 
conditions,  and  of  political,  legal,  social,  and  economic  con- 
siderations bearing  thereon.  In  addition  to  the  newspapers 
and  magazines,  some  of  which  are  known  as  "business  peri- 
odicals," there  are  over  3,500  trade  and  agricultural  papers  in 
the  United  States,  the  chief  purpose  of  which  is  to  gather 
and  circulate  market  news.  The  annual  and  special  reports 
of  produce  exchanges,  chambers  of  commerce,  and  trade  as- 
sociations9 also  contain  valuable  market  news. 

The  mails,  the  telegraph,  and  telephone  are  also  used  ex- 
tensively. The  sources  just  mentioned  are  mainly  dependent 
upon  these  for  collecting  and  communicating  the  news  which 
they  interpret  and  circulate.  By  means  of  these  the  news 
bureaus  and  telegraph  companies,  private  market  reporting 
agencies,  and  private  wire  houses10  send  out  data  on  opening 
and  closing  prices  on  produce  exchanges  and  on  stock  ex- 
changes ;  and  quotations  are  sent  put  daily  by  commission  mer- 
chants and  wholesale  receivers  to  the  country  shippers  of  grain 
and  other  produce.  Goods  are  ordered  by  mail,  telegraph, 
and  telephone,  and  quotations  are  made  by  the  same  means. 
Private  information  from  salesmen  and  agents  is  received 
through  these  mediums,  and  general  market  information  is  also 
sent  over  the  wires  and  by  mail. 

Finally,  as  important  a  source  as  any  to  many  business 
men  is  market  news  conveyed  by  word  of  mouth — conversa- 
tion with  salesmen  and  buyers,  advice  secured  from  bankers 

9  See  the  discussion  of  open  price  associations,  pp.  389-390. 

10  See  James  E.  Boyle,  op.  cit.,  pp.  17,  217. 


386  PRINCIPLES  OF  MARKETING 

and  private  research  and  statistical  agencies,  talks  with  busi- 
ness associates,  friends,  and  acquaintances. 

News  of  the  Agricultural  Market. — In  view  of  its  impor- 
tance and  the  difficulties  involved  in  its  collection  perhaps 
the  most  complete  and  accessible  information  is  available 
concerning  the  domestic  agricultural  market.  Especially  valu- 
able is  the  work  of  the  Bureau  of  Markets  and  Crop  Esti- 
mates of  the  United  States  Department  of  Agriculture  and  of 
the  Bureau  of  the  Census  of  the  Department  of  Commerce. 

The  purpose  of  the  market  reports  of  the  Bureau  of  Markets 
and  Crop  Estimates  is  "to  cover  the  markets  upon  every  farm 
commodity  which  constitutes  an  important  part  of  the  Na- 
tion's food  and  clothing  supplies  ...  for  the  express  benefit 
of  producers,  distributers  and  consumers."  1X  This  service  has 
to  do  principally  with  current  market  newiS — prevailing  prices 
in  different  markets,  amounts  shipped  from  various  producing 
areas  to  specific  markets,  current  production  and  available 
stocks.  The  crop  reports,  on  the  other  hand,  are  primarily 
important  as  a  means  of  estimating  future  conditions  of  sup- 
ply— acres  planted  and  the  condition  of  the  crops  at  various 
times  during  the  growing  season.12  For  the  year  1921-22  the 
appropriation  for  the  market  news  service  of  this  bureau  is 
$601,560.  It  is  proposed  to  spend  this  sum  according  to  the 
>following  allotments:  13 

Leased  wires $  67,000 

News  service  on  live  stock  and  meats 160,240 

News  service  on  fruits  and  vegetables 248,680 

News  service  on  dairy  products 68,300 

News  service  on  hay,  feed  and  seed 27,780 

Transportation  service 9,500 

Market  information  (general)   14,860 

Bureau  administration    5,200 

$601,560 
n  W.  A.  Wheeler  and  Frank  George,  Know  Your  Markets  (Separate 

No.  834,  from  the  U.  S.  Department  of  Agriculture,   Yearbook,   1920, 

p.  146). 

13  The  Bureau  of  the  Census  covers  this  work  for  the  cotton  crop. 
"  From  a  letter  from  the  Bureau. 


MARKET  NEWS  387 

"The  Bureau  of  Markets  has  in  the  United  States  73  branch 
offices  located  at  46  large  market  centers,  16  of  which  are  directly 
connected  with  the  Washington  office  and  with  each  other  by  some 
4,500  miles  of  leased  telegraph  wires.  Marketing  experts  keep 
in  constant  touch  with  market  conditions  in  the  field  and  at  con- 
suming centers  and  at  least  15,000  responsible  individuals,  firms, 
and  railroads — voluntary  reporters — render  reports  to  the  bureau 
regularly  upon  the  marketing  of  farm  products.  Mimeographed 
reports  are  still  sent  to  producers  and  the  trade  direct,  but  by  the 
use  of  the  telegraph  and  the  press  and  latterly  of  the  wireless 
these  and  the  other  reports  sent  out  by  the  Bureau  of  Markets  are 
received  by  not  less  than  15,000,000  potential  readers."  * 

Other  important  sources  of  market  information  for  agri- 
cultural products  are  the  dailyju^taJiiiQS-sejat^out^ by  tele- 
graph of  transactions  on  ]J?e3uce  exchanges,  the  numerous 
market  reporters  15  and  trade  journals  of  local,  sectional,  and 
national  circulation,  the  daily  papers,  th3  annual  reports  of 
produce  exchanges,  and  the  reports  of  the  International  In- 
stitute of  Agriculture  at  Rome.16 

News  of  Manufacturers'  Markets. — There  are  as  yet  no 
governmental  bodies  in  the  United  States  engaged  in  gather- 
ing market  news  of  manufactured  products  on  anything  like 
the  scale  on  which  news  of  the  agricultural  market  is  col- 
lected. The  work  of  the  Bureau  of  Foreign  and  Domestic 
Commerce  in  the  field  of  foreign  trade  will  be  touched  upon 
later.  The  Federal  Trade  Commission  is  making  constant 

14  W.  A.  Wheeler  and  Frank  George,  op.  cit.,  pp.  131-132. 

15  The  largest  private  news  agency  of  the  grain  trade  is  BroomhalFs. 
It  has  representatives  throughout  the  world.    The  news  which  it  gathers 
is    cleared    through    the    headquarters    at    Liverpool.      See    Bruce    D. 
Mudgett,  "Current  Sources  of  Information  in  Produce  Markets,"  The 
Annals   of   the   American   Academy    of   Political   and   Social   Science, 
Vol.  XXXVIII  (1911),  p.  433.    In  the  produce  trade  the  Urner-Barry 
Company  of  New  York  is  perhaps  the  best  known.    See  L.  D.  H.  Weld, 
The  Marketing  of  Farm  Products,  pp.  301-304,  and  the  Report  of  the 
Federal  Trade  Commission  on  the  Wholesale  Marketing  of  Food  (1920), 
pp.  227-228. 

"An  interesting  discussion  of  the  sources  of  price  information  avail- 
able to  country  elevators  will  be  found  in  the  Report  of  the  Federal 
Trade  Commission  on  the  Grain  Trade  (1920),  Vol.  I,  pp.  175-187. 


388  PRINCIPLES  OF  MARKETING 

contributions,  and  more  recently  certain  bureaus  in  the  De- 
partment of  Commerce  have  devoted  considerable  attention 
to  domestic  conditions  in  the  market  for  manufactured  com- 
modities. A  start  has  been  made  in  the  Monthly  Survey  of 
Current  Business  conducted  by  the  Bureau  of  the  Census,  the 
Bureau  of  Foreign  and  Domestic  Commerce,  and  the  Bureau 
of  Standards  of  this  Department.  The  first  number  was 
issued  in  August,  1921.  This  gives  summarized  comparative 
figures  of  stocks,  production,  and  prices  for  important  com- 
modities, of  foreign  trade  conditions,  transportation,  retail 
trade,  banking  and  finance,  interest  rates,  earnings  and  em- 
ployment, the  cost  of  living,  and  other  subjects.17  The  De- 
cennial Census  reports  and  the  Census  of  Manufactures,  many 
of  the  publications  of  the  Bureau  of  Standards,  and  the  in- 
formation contained  in  the  Monthly  Review  of  the  Bureau 
of  Labor  Statistics  of  the  Department  of  Labor,  also  contain 
valuable  information.18 

Trade  Associations  and  Trade  Papers. — Another  important 
source  of  information  concerning  manufactured  lines  is  the 
work  of  trade  associations  and  trade  papers  in  gathering  and 
distributing  news  of  trade  tendencies,  prices,  supplies,  and 
'demand.  It  has  been  estimated  that  there  are  several  thou- 
sand trade  associations  in  the  United  States  securing  and 
circulating  market  news  in  one  way  and  another.  These  as- 
sociations may  be  particularly  serviceable  in  industries  in 

17<<The  general  idea  is  to  establish  monthly  some  composite  picture 
of  our  industries  in  such  form  that  it  will  be  of  practical  service  in  guid- 
ing business  men  in  general  business  situations. 

"At  the  present  time  [Nov.,  1921]  .  .  .  the  Bureau  of  Census  is  act- 
ing as  a  center  point  for  the  clearing  of  statistics  from  some  twenty-five 
or  thirty  trade  associations  as  well  as  from  the  records  of  the  Bureau  of 
Census,  all  other  Government  departments  and  private  and  semi-private 
statistical  organizations." — Extracts  from  a  letter  from  the  Department 
of  Commerce. 

18  Other  governmental  bureaus  which  collect  and  disperse  important 
market  news  are  the  Weather  Bureau,  the  U.  S.  Geological  Survey 
(minerals),  and  the  Bureau  of  Forestry. 


MARKET  NEWS  389 

which  there  are  many  competing  firms,  all  relatively  small. 
For  only  by  cooperative  action,  or  by  governmental  assistance, 
can  the  facts  be  obtained  and  the  expense  of  collecting,  in- 
terpreting, and  publishing  them  be  borne. 

Open  Price  Associations. — An  interesting  development  of 
trade  association  activities  is  the  "open  price  association." 
Under  this  plan  members  of  the  association  submit  to  each 
other,  or  more  often  to  the  secretary  of  the  association,  the 
prices  which  they  have  received  for  goods  sold,  or  the  prices 
which  they  have  submitted  as  bids  on  proposed  sales.  This 
information  is  then  sent  to  the  members  of  the  association. 
The  purpose  is  to  give  them  immediate  knowledge  of  what  has 
transpired  in  the  market.19  But  these  associations  have  some- 
times gone  further.  The  secretaries  have  "interpreted"  the 
data,  and  suggestions  concerning  the  future  trend  of  prices 
have  been  issued.  In  other  cases  definite  price  agreements 
have  been  entered  into. 

The  legal  status  of  the  open  price  association  has  been  un- 
certain, but  recent  court  decisions  seem  to  show  that  (1)  so 
long  as  they  merely  gather  and  disperse  news  of  what  has  al- 
ready happened  they  are  legal.20  (2)  But  when  they  go 
further  and  the  reports  are  "interpreted"  by  the  secretary, 
who  recommends  harmony  of  action,  it  is  illegal  under  the 
Sherman  Act.21  Since  a  case  involving  the  first  principle 

"See  H.  R.  Tosdal,  "Open  Price  Associations,"  The  American  Eco- 
nomic Review,  Vol.  VII  (June,  1917),  pp.  331-352;  Arthur  J.  Eddy,  The 
New  Competition  (1912);  Emmett  H.  Naylor,  Trade  Associations 
(1921),  Chaps.  VIII,  X,  XIII,  XV-XVIII. 

"Judge  Carpenter  of  the  Federal  District  Court  in  the  case  of  the 
United  States  vs.  the  Armstrong  Bureau  of  Related  Industries  (Dec.  3, 
1921),  made  a  comparison  between  the  operations  of  an  exchange  in 
issuing  price  quotations  (which  has  been  held  legal)  and  the  acts  of 
this  association.  "An  exchange  sends  out  reports  of  actual  sales.  The 
Armstrong  Bureau  gave  out  price-lists.  It  is  difficult  to  understand  any 
ground  for  declaring  one  legal  and  the  other  illegal." — From  a  news- 
paper report  of  the  decision. 

21  See  the  decision  of  the  Supreme  Court  in  the  case  of  the  United 
States  vs.  The  American  Hardwood  Lumber  Manufacturers'  Association 


390  PRINCIPLES  OF  MARKETING 

has  not  yet  come  before  the  Supreme  Court,  a  question  still 
exists  as  to  where  the  line  between  the  legal  and  illegal  acts 
will  finally  be  drawn.  In  the  "Hardwood  Lumber  Case"  the 
Supreme  Court  drew  a  distinction  which  Judge  Carpenter  did 
not  draw  in  the  "Linseed  Oil  Case"  22  to  the  effect  that  market 
news  distributed  by  government  publications  and  by  ex- 
changes goes  to  both  buyer  and  seller,  whereas  the  reports  of 
the  association  go  only  to  the  members.  But  the  Court  made 
this  as  one  point  and  made  a  separate  point  of  the  fact  that 
there  was  no  skilled  interpreter  of  the  prices  in  the  case  of 
government  publications  and  exchange  quotations  whose  in- 
terpretation might  lead  to  uniform  action  among  "competi- 
tors," whereas  there  was  in  the  case  of  the  lumber  association. 
It  is  not  clear,  consequently,  whether  the  fact  that  the  in- 
formation goes  to  members  alone,  in  the  absence  of  "inter- 
pretation," would  be  considered  legal  or  illegal. 

Important  Sources  of  Foreign  Trade  News. — The  most 
important  statistics  of  foreign  trade  are  those  gathered  by 
the  Bureau  of  Foreign  and  Domestic  Commerce  of  the  De- 
partment of  Commerce,  and  published  in  the  Monthly  Sum- 
mary of  Commerce  and  Finance,  in  the  Weekly  Commerce  Re- 
ports, and  in  special  reports  issued  from  the  Bureau.  These 
reports,  which  are  obtained  from  other  governmental  depart- 
ments, as  well  as  by  the  staff  of  the  Bureau,  give  compara- 
tive figures  covering  the  value,  and  often  the  quantity,  of  im- 
ports and  exports  for  each  month  of  the  current  year,  for 
the  corresponding  month  of  the  past  year,  and  for  preceding 
years.  A  complete  report  of  the  exports  and  imports  of  spe- 
cific products  is  included  in  the  annual  report  Commerce  and 
Navigation.  This  Bureau  also  issues  a  weekly  paper, 
Weekly  Commerce  Reports,  covering  conditions  existing  in 
various  foreign  countries  and  even  giving  specific  market 

(Dec.  19,  1921).  This  case  and  the  legal  status  of  open  price  associations 
are  discussed  by  E.  H.  Naylor  in  an  article,  "The  Hardwood  Lumber 
Case,"  in  Administration,  Vol.  3   (April,  1922),  pp.  487-493. 
22  See  note  20,  p.  389. 


MARKET  NEWS  391 

opportunities.  Special  pamphlets  are  published  on  market 
conditions  in  the  sale  of  particular  products  and  on  trade 
conditions  in  particular  parts  of  the  world.  Finally,  con- 
fidential information  of  specific  trade  opportunities  is  given 
to  accredited  manufacturers. 

Much  of  the  information  which  the  Bureau  of  Foreign  and 
Domestic  Commerce  publishes  is  received  through  reports 
from  the  members  of  the  consular  service,  which  is  attached 
to  the  Department  of  State.  There  are  some  300  United 
States  consular  offices  throughout  the  world,  one  of  the  main 
functions  of  which  is  to  keep  in  touch  with  commercial  op- 
portunities and  business  conditions,  and  to  collect  information 
that  will  be  helpful  to  American  business  men.  The  results  of 
their  efforts  are  made  available  largely  through  the  Bureau. 

Some  of  the  large  banks  and  such  institutions  as  the  Phila- 
delphia Commercial  Museum  also  gather  news  of  general  and 
specific  foreign  trade  opportunities,  and  in  some  cases  make 
special  investigations  for  their  clients.  Information  concern- 
ing foreign  tariffs  can  be  procured  through  such  private 
agencies  as  those  mentioned,  as  well  as  through  the  Bureau 
of  Foreign  Trade  Advisers  of  the  Department  of  State,  the 
Tariff  Commission,  the  Pan-American  Union,  and  the  Bureau 
of  Foreign  and  Domestic  Commerce. 

News  of  General  Commodities. — Valuable  sources  of  in- 
formation about  prices  of  general  commodities  are  the  monthly 
and  special  reports  of  the  Bureau  of  Labor  Statistics  of  the 
Department  of  Labor.  This  information  is  published  in  the 
Monthly  Labor  Review  and  in  special  reports  on  wholesale 
and  retail  prices.  The  statistical  tables  which  are  included 
cover  prices  for  the  current  year  as  well  as  for  several  years 
past.  Unfortunately,  these  data  are  usually  published  some 
time  after  the  facts  are  gathered,  although  such  parts  as  have 
a  news  value  for  periodicals  are  given  out  in  advance  of  the 
regular  publication.  The  new  Survey  of  Current  Business  is- 
sued by  the  Department  of  Commerce  also  bids  fair  to  be  of 
great  value  in  circulating  news  of  this  kind. 


392  PRINCIPLES  OF  MARKETING 

General  Market  Conditions. — Finally,  all  business  men  are 
interested  in  what  may  be  called  general  market  news,  that 
is,  news  which  indicates  the  general  conditions  which  prevail 
throughout  the  country  and  the  world — looked  at  not  as  a 
particular  market,  but  as  a  great  complexity  of  markets. 
There  are  certain  general  sources  or  "indices"  to  which  busi- 
ness men  commonly  look.23  These  relate  to  the  conditions 
that  exist  in  such  markets  as  the  following:  (1)  general  busi- 
ness— including  building  and  real  estate,  iron  production,  bank 
clearings,  business  failures,  labor  conditions,  immigration, 
crop  conditions;  (2)  financial  Conditions — including  conditions 
in  the  money  market,  foreign  trade,  gold  movements,  commod- 
ity prices;  (3)  the  investment  market — including  prices  of 
securities,  crop  statistics,  railroad  earnings,  and  social  condi- 
tions. Conditions  in  the  steel  market  are  also  considered  of 
particular  importance  in  determining  the  general  conditions 
of  industry.  Some  of  these  markets  are  of  particular  interest 
to  certain  groups  of  business  men,  some  to  others.  Thus,  the 
first  group  of  markets  is  believed  to  show  the  trend  of  the 
general  business  situation,  the  second  group  applies  to  the 
money  market,  and  the  last  group  to  the  investment  market. 
Some  statistics,  such  as  stock  market  prices,  banking  and 
building  statistics,  are  used  to  forecast  future  conditions; 
whereas  others,  such  as  imports  of  merchandise,  commodity 
prices,  or  business  failures,  are  better  used  to  indicate  the 
existing  situation,  although  future  tendencies  may  also  be 
indicated  by  them. 

Ill 

Control  of  Market  News. — Since  the  activities  of  producers 
and  traders,  and  even  those  of  consumers,  are  guided  by  their 

28  See  R.  W.  Babson,  "Barometric  Indices  of  the  Conditions  of  Trade," 
Annals  oj  the  American  Academy,  Vol.  XXXV  (1910),  pp.  593  ff;  also 
M.  T.  Copeland,  Business  Statistics  (1917),  pp.  98-131,  and  Vol.  I  of 
the  publications  of  the  Harvard  University  Committee  on  Economic 
Research. 


MARKET  NEWS  393 

knowledge  of  the  market,  it  is  important  that  news  should 
be  accurate  and  timely.  Prices,  otherwise,  will  not  reflect  true 
conditions,  and  great  harm  may  result  to  the  public,  as  well 
as  to  private  traders  and  producers.  The  statement  that  the 
crops  in  a  particular  section  are  abnormally  large  or  small 
will  commonly  have  an  immediate  effect  on  prices.  If  the 
statement  is  false,  prices  will  be  out  of  line  with  actual  con- 
ditions. This  will  cause  unwarranted  loss  to  some  and  gain 
to  others.  Here,  is  a  great  opportunity  for  private  indi- 
viduals, by  spreading  false  news,  to  reap  large  gains  at  the 
expense  of  others.  It  is,  consequently,  important  that  the  in- 
formation which  is  dispersed  shall  be  accurate.  In  "future" 
markets  where  even  a  rumor  may  cause  changes  in  prices 
amounting  to  thousands,  or  even  millions  of  dollars  in  the 
aggregate,  it  is  particularly  important  that  the  dissemination 
of  market  news  be  carefully  guarded.  On  the  Chicago  Board 
of  Trade  in  order  to  safeguard  the  news  a  very  strict  con- 
trol is  exercised  by  the  Market  Reports  Committee  over  all 
news  issued  by  members  of  the  Board,  and  by  any  others  who 
receive  their  information  through  it,  i.  e.,  over  all  individuals 
and  firms  over  whom  it  can  exercise  control.  This  includes 
the  reports  of  private  wire  houses,  the  private  reporting  agen- 
cies, members'  daily  market  letters,  and  the  reports  of  tele- 
graph and  news  ticker  companies.  The  market  letters  of 
members  are  not  allowed  to  forecast  the  market  or  to  give 
advice.  Market  rumors  are  forbidden.24 

Large  firms  can  usually  afford  the  expense  involved  in  gath- 
ering market  news,  and  those  who  control  a  large  part  of 
the  trade  in  any  particular  commodity  have  through  their 
own  records  the  means  of  determining  market  conditions  with 
a  fair  degree  of  accuracy.  But  smaller  firms  have  no  such 
facilities.  To  meet  their  needs  either  associative  activity  or 
governmental  action  is  necessary.  In  this  country  the  former 

24  See  the  rules  of  the  Board  of  Trade ;  also  the  Report  of  the  Federal 
Trade  Commission  on  the  Grain  Trade,  Vol.  V,  pp.  68-79,  and  J.  E. 
Boyle,  op.  cit.,  pp.  96-97. 


394  PRINCIPLES  OF  MARKETING 

has  been  rapidly  developing  among  dealers  and  producers  of 
manufactured  products  and  raw  materials  other  than  farm 
products.  And  thus  far  governmental  activity  has  been  more 
concerned  with  farm  products.  At  present  there  is  a  move- 
ment toward  governmental  assistance  in  gathering  news  of 
the  manufacturers'  market.  And  in  the  farm  market  such 
large  organizations  as  the  California  Fruit  Growers'  Exchange 
and  the  new  United  States  Grain  Growers  Incorporated  collect 
information  for  themselves. 

News  Collected  and  Dispersed  by  the  Government  and 
by  Associations. — News  gathered  by  the  government  and  by 
trade  associations  is  not  always  so  timely  as  that  obtained 
by  large  individual  firms,  so  that  these  are  often  in  posses- 
sion of  essential  facts  some  time  before  those  who  depend 
on  the  government,  trade  associations,  or  other  outside  agen- 
cies. On  the  other  hand,  the  news  gathered  by  governments 
and  by  trade  associations  is  likely  to  be  much  more  extensive 
and  accurate.  This  is  partly  due  to  the  greater  resources 
which  may  be  made  available  to  cover  the  expense  involved, 
and,  sometimes,  to  the  greater  spirit  of  cooperation  which  is 
likely  to  prevail  among  those  with  facts  to  contribute.  Finally, 
the  government  may,  if  the  public  welfare  demands,  insist  on 
receiving  pertinent  news.25 

Wherever  there  are  many  small  business  men  engaged  in 
an  industry  it  is  essential  that  some  neutral  and  impartial 
agency  should  gather  and  disperse  market  news.  Private 
information  when  collected  is  commonly  only  for  the 
limited  use  of  those  who  gather  it,  and  when  published  it  may 
be  colored  by  the  point  of  view  of  the  compiling  firm.  Ap- 
parently the  great  number  of  both  producers  and  dealers  who 

25  The  efforts  of  the  Federal  Trade  Commission  to  compel  business 
firms  to  file  reports  on  forms  presented  by  the  Commission — a  power 
given  by  section  6  of  the  Federal  Trade  Commission  Act — has  been 
halted  by  temporary  injunction  in  the  case  of  the  coal  and  steel  indus- 
tries. See  Annual  Report  of  the  Federal  Trade  Commission  (1920), 
pp.  48-52;  ibid.  (1921),  pp.  54-56. 


MARKET  NEWS  395 

are  working  on  a  relatively  small  scale  can  receive  adequate 
market  information  only  through  some  governmental  agency 
or  through  cooperation  on  a  very  large  scale.26 

Conclusion. — It  may  be  said,  finally,  that  if  the  market 
news  were  complete,  accurate,  correctly  interpreted,  and  thor- 
oughly disseminated,  demand  and  supply,  in  the  absence  of 
unforeseen  natural  conditions  or  artificial  restrictions — such 
as  patents  and  monopolies,  governmental  or  private — would 
always  balance;  and  business  profits,  as  a  reward  for  risk- 
bearing,  would  be  entirely  absent.  But  these  conditions  are 
far  from  realized;  and,  consequently,  producers  and  dealers 
face  the  possibility  of  gain  or  loss,  high  prices  or  low,  accord- 
ing as  they  are  so  fortunate  or  so  keen  as  to  possess  articles 
for  which  the  demand  is  great,  or  so  unfortunate  as  to  possess 
those  for  which  the  demand  is  small.  /In  the  modern  market 
business  success  depends  very  largely  on  the  ability  of  the  in- 
dividual business  man  to  forecast  his  market  properly. 

26  Duncan  believes  that  market  news  is  so  important  that  its  collection 
will  ultimately  be  considered  in  the  light  of  a  public  utility.  See  C.  S. 
Duncan,  Marketing:  Its  Problems  and  Methods  (1920),  p.  219. 


CHAPTER  XIX 
STANDARDIZATION 

Some  of  the  most  important  problems  involved  in  market- 
ing center  about  the  preparation  of  products  for  market.  The 
most  important  of  these  is  the  endeavor  to  divide  merchan- 
dise into  groups  with  such  common  characteristics  as  have 
proved  to  be  important  in  exchange — that  is,  to  standardize 
them  on  the  basis  of  quality  and  size.  Closely  related  to  this 
are  the  adoption  of  standard  units  of  measure  and  of  price 
quotations,  and  the  adoption  of  standard  containers.  The 
purpose  of  standardization,  in  so  far  as  it  affects  marketing, 
is  to  prepare  goods  so  that  they  will  best  meet  the  demands 
of  the  market,  and  so  that  a  common  standardized  nomencla- 
ture can  be  utilized  in  bringing  about  an  understanding  be- 
tween buyer  and  seller.1  The  standardization  of  commodities 
may  be  a  production  activity,  or  it  may  be  a  market  activity. 
But  the  possibility  of  standardizing  arises  from  the  fact  that 
the  products  involved  have  common  characteristics.  That  is, 
it  is  determined  by  the  results  of  production. 

Standardization  Makes  Exchange  Easier.-^Products  which 
are  standardized  as  to  all  characteristics  considered  important 

(*Most  of  the  discussions  on  marketing  have  emphasized  grading. 
But  the  important  thing  is  the  standard.  Grading  is  simply  a  means 
of  dividing  products  of  varying  quality  and  size  into  lots  conforming 
to  certain  standards,  or  it  is  a  means  for  determining  to  what  standard 
goods  of  similar,  but  as  yet  unknown,  qualities  conform. \  When  goods, 
as  produced,  are  not  standardized  or  when  the  standard'to  which  they 
conform  is  unknown,  grading  or  classification  is  necessary.  But  when 
the  production  can  be  sufficiently  controlled,  grading  is  unnecessary. 
See  also  H.  B.  Vanderblue,  "The  Functional  Approach  to  the  Study  of 
Marketing,"  Journal  of  Political  Economy,  Vol.  XXIX  (October,  1921), 
pp.  676-683. 

396 


STANDARDIZATION  397 

by  the  buyer  can  be  sold  on  the  basis  of  sample,  grade,  de- 
scription, and  symbol.2  Purchase  and  sale  are  thereby  greatly 
simplified.)  With  quantity,  size,  and  quality  (material  char- 
acteristics and  performance  in  use)  standardized,  price  is  the 
only  indeterminate  factor. 

/Standards  likewise  make  sale  by  inspection  and  sample 
easier.  This  is  the  case  because  fewer  samples  need  be  taken 
and  because  these  samples  conform  more  closely  to  the  bulk 
than  do  samples  of  unstandardized  goods.;  Consumers  tend  to 
insist,  furthermore,  upon  purchasing  a  standardized  product. 
Because  their  particular  purpose  demands  a  standard  product, 
or  because  they  find  it  easier  to  purchase  them,  buyers  will 
often  pay  a  premium  for  standardized  goods.(  On  account  of 
this  premium  it  pays  the  seller  to  standardize  when  the  cost 
is  not  too  great.  The  premiums  which  Washington  apples  re- 
ceive over  the  ungraded  product  of  eastern  states,  the  premium 
paid  for  graded  wool  and  the  low  price  at  which  a  "farmer's 
car"  of  ungraded  potatoes  is  sold  are  all  cases  in  point.3 

Another  advantage  from  standardization  is  that  lots  made 
at  different  times  or  by  different  producers  may  be  mixed  to- 
gether, if  all  essential  characteristics  are  the  same.  \  Orders 
for  future  delivery  can  also  be  given  on  the  basis  01  prede- 
termined standards.  Financing  is  likewise  rendered  less  dif- 
ficult, because  the  value  of  uniform  lots  is  more  readily  de- 
termined and  because  sale  can  be  made  with  greater  ease  and 
on  shorter  notice  than  is  the  case  with  unstandardized  goods. N' 
Fluctuations  in  prices  can  be  more  certainly  followed  and 
more  quickly  known.  Risk  is  thus  lessened,  and  so  financing 
is  rendered  safer  and  cheaper.  The  product  comes  nearer  to 
"financing  itself,"  since  it  can  be  more  readily  used  as  col- 

aSee  pp.  23-27;  also  H.  B.  Vanderblue,  "The  Marketing  Function  of 
Advertising,"  Advertising  and  Selling  (June  5,  1920),  pp.  16-18. 

3  "Compared  with  the  cost  of  its  performance  there  is  none  of  the 
marketing  functions  which  enhances  the  value  of  commodities  as 
greatly  as  this  one  of  grading." — P.  T.  Cherington,  Elements  of  Mar- 
keting (1920),  p.  74. 


398  PRINCIPLES  OF  MARKETING 

lateral  security  for  the  loans  made  to  move  it  to  the  market.) 
Finally,  when  standards  are  known  and  accepted  throughout  a 
large  market  area,  market  news  of  supply,  demand,  and  price 
reaches  its  maximum  of  accuracy  and  hence  its  maximum 
value.* 

Standardization  Aids  Physical  Supply. — Standardization 
likewise  decreases  the  difficulties  and  the  costs  involved  in 
the  transportation  and  storage  of  products.  'Useless  parts  can 
be  eliminated  from  a  given  bulk,  leaving  only  those  units 
which  conform  to  the  standards  set  for  the  particular  purpose 
to  which  the  product  is  to  be  put.^Eaqh  grade,  furthermore, 
of  a  standardized  product  can  go^  more  directly  to  its  final 
place  of  use. )  For  example,  when  agricultural  products  are 
graded  at  the  producing  market  it  becomes  unnecessary,  pro- 
vided the  standards  are  recognized  in  the  trade  and  the  pur- 
chasers have  faith  in  the  honesty  of  the  grading,  to  concentrate 
these  products  in  the  warehouses  of  central  market  middlemen 
simply  for  the  purpose  of  grading. 

^  Bases  for  Standards. — The  basis  upon  which  a  standard 
rests  may  be/  (1)  a  quantity  basis,  such  as  those  standards  of 
weights  and  measures,  which  have  been  established  by  the 
governments  of  the  civilized  world;  (2)  it  may  be  a  numerical 
basis,  such  as  the  dozen,  gross,  ream,  etc.;  (3)  it  may  be  a 
basis  of  size  and  measurement,  as  with  screws,  bolts,  lumber, 
shoes,  clothing,  rugs,  and  thread;  (4)  it  may  be  a  quality 
basis — positive  quality,  as  in  the  case  of  grain  and  cotton 
standards,  and  chemical  contents;  negative  qualities,  as  with 
the  pure  food  and  drug  laws;5  (5)  lit  may  be  a  service  basis? 
Service  is  obviously  least  amenable  to  standardization.  The 
average  merchandising  establishment,  retail  store  or  whole- 

*The  relation  of  standards  to  farm  markets  is  well  developed  in  L. 
D.  H.  Weld,  The  Marketing  oj  Farm  Products,  pp.  362-364.  See  also 
H.  Bruce  Price,  ''Grain  Standardization,"  in  the  American  Economic 
Review,  Vol.  XI  (June,  1921),  pp.  227-230. 

5  See  C.  A.  Adams,  "Industrial  Standardization,"  Annals  oj  the  Ameri- 
can Academy  oj  Political  and  Social  Science,  Vol.  LXXXII  (March, 
1919),  p.  290. 


STANDARDIZATION  399 

sale  house  is  nevertheless  fundamentally  engaged  in  the  sale 
of  service,  (it  is  the  desire  of  such  firms  to  establish  in  the 
minds  of  the  public  which  they  serve  the  idea  that  they  are 
rendering  a  high  standard  of  service.  The  service  of  trans- 
portation companies  likewise  tends  to  become  standardized.6 
The  manufacturer,  too,  frequently  tries  to  convey  an  impres- 
sion to  the  minds  of  prospects  and  customers  of  the  high 
standard  of  products  and  service  which  his  house  sells.  For 
example,  house  brands  are  used  in  the  sale  of  a  "family"  of 
products  for  the  purpose  of  attaching  the  reputation  of  the 
house  to  the  particular  products  which  bear  the  brand,  i.  e., 
the  manufacturer  tries  to  assist  the  sale  of  all  of  his  products 
(ty  impressing  upon  the  minds  of  consumers,  through  the  house 
brand,  the  idea  that  the  standard  quality  and  service  which 
the  house  stands  for  is  behind  every  product  on  which  the 
brand  appears.  "\  Finally,  ((6)^  price  may  be  standardized)  The 
"one  price  policy"  which  prevails  so  largely  in  our  retail 
stores,  and  which  is  coming  to  be  common  in  the  sale  of  many 
manufactured  products  at  wholesale,  is  after  all  a  standardized 
price;  i.  e.,  so  far  as  purchasers  are  concerned  the  price  is 
standardized.  'Each  buyer  does  not  need  to  bargain  in  order  to 
be  sure  that  he  is  getting  as  low  a  price  as  other  buyers.  Pub- 
lic utility  rates,  likewise,  are  examples  of  standardized  price/) 

Standards  May  Rest  on  Several  Bases. — A  standard  need 
not  rest  on  but  one  basis;  it  may  involve  several.  (Coins,  for 
example,  are  standardized  as  to  quality  and  weight;  grain  is^ 
standardized  as  to  weight,  moisture  content,  quality,  and  color.) 
The  standards  set  may  be  generally  recognized  in  a  given 
trade,  to  which  all  producers  conform,  and  to  which  all  prod- 
ucts are  compared ;  such  are  wheat  and  cotton  grades,  thermal 
units  with  coal,  metal  content  with  steel  rails,  thread  count  and 
quality  of  thread  with  cloth.     They  may  be  standards  set 
by  individual  producers  which  are  not  directly  comparable 

*The  uniform  bill  of  lading,  uniform  warehouse  receipts  and  service, 
and  the  banker's  acceptance  are  also  examples  of  important  market 
standards,  and  so  are  the  meaning  of  price  quotations — such  as  f.o.b., 
c.i.f.,  etc. — when  they  become  uniform. 


400  PRINCIPLES  OF  MARKETING 

to  competing  products.  Such  standards  are  usually  repre- 
sented by  trade  names  and  brands.  (  Finally,  the  standards 
may  be  specifications  set  by  buyers  or  sellers,  such  as  cot- 
ton merchants'  samples,  specifications  for  machines,  and  the 
like.  (Generally  recognized  standards  are  common  with  pro- 
duction goods,  and  particularly  with  raw  materials.  Indi- 
vidual standards  are  usual  with  goods  for  personal  consump- 
tion and  with  equipment.) 

Responsibility  for  the  Observance  of  Standards.-v-It  is 
evident  that  to  realize  the  greatest  advantages  from  stand- 
ardization the  standards  must  conform  to  recognized  demands 
of  the  market  and,  of  fundamental  importance,  there  must  be 
faith  on  the  part  of  the  buyer  and  seller  in  the  standards 
established.;  This  faith  may  rest  upon  the  fact  that  an  ef- 
ficient and  disinterested  official  has  examined  the  products 
and  has  declared  that  they  conform  to  a  particular  standard. 
The  grading  of  grain  by  the  inspection  departments  of  produce 
exchanges,  and  more  especially  by  government  officials,  is 
one  of  the  best  examples.  Other  examples  of  governmental 
standards  are  found  in  the  standard  container  acts,  the  regu- 
lation of  weights  and  measures,  the  establishment  of  grain 
and  fruit  grades,  and  of  official  cotton  grades.  Such  work  is 
carried  on  by  the  state  and  Federal  governments.  Some  of  the 
most  important  market  activities  of  the  Federal  Government 
are  those  connected  with  the  enforcement  of  the  grain  stand- 
ards act  and  similar  acts,  the  standard  barrel  act,  and  the  work 
of  the  Bureau  of  Markets  and  Crop  Estimates,  the  Bureau  of 
Standards,  and  the  administration  of  the  pure  food  laws. 

In  other  cases  this  faith  in  established  standards  must 
arise  out  of  belief  in  the  honesty  of  the  seller  who  declares 
the  product  to  be  of  a  certain  quality/  Confidence  of  this 
kind  is  evidenced  in  the  sale  of  branded  products,  such  as 
California  fruits  and  many  manufactured  products.  The 
precise  elements  which  are  standard  may  be  uncertain;  but 
if  the  product  meets  one's  need,  and  if  he  has  faith  that 
further  purchases  of  this  brand  will  be  up  to  the  standards 


STANDARDIZATION  401 

of  the  past,  he  can  buy  the  product  with  assurance  that  it 
will  continue  to  give  the  same  degree  of  satisfaction,  so  long 
as  his  personal  reaction  remains  the  same.  Even  in  the 
absence  of  such  faith  advantages  result  from  the  standardiza- 
tion of  products.  For  the  product  is  easier  to  inspect,  even 
though  lack  of  faith  in  the  standard  makes  it  undesirable  to 
purchase  by  description  or  symbol.  ) 

Standards  and  the  Buyer. — Standards  are  commonly  set 
to  accord  with  the  needs^fjbu^ers,7  This  is  especially  true 
of  production  goods — materials  to  be  processed.8  Standards 
set  with  the  buyer  in  mind  are  also  important  in  the  case  of 
goods  sold  for  personal  consumption.  This  is  due  funda- 
mentally to  the  fact  that  consumers  buy  those  goods  which 
they  have  found  to  suit  their  needs  best.  Standardization  as- 
sumes particular  importance  when  goods  are  advertised  and 
sold  by  trade-mark,  trade  name,  or  other  symbol.  These  de- 
vices attached  to  a  standard  product  enable  the  satisfied  con- 
sumer to  buy  the  same  product  again,  without  the  need  for 
further  experimentation.  If  the  goods  do  not  meet  his  fancy;*1 
it  is  likewise  easy  for  him  to  avoid  them  in  the  future. 

Mass  Selling  Methods  Call  for  Standardization. — Stand- 
ardization is  likewise  important  to  sellers.  This  is  particularly 
true  of  those  who  utilize  mass  methods  of  selling.  The  use 
of  advertising,  for  example,  in  most  of  its  manifestations  is 
dependent  upon  mass  appeals.  Mass  methods  are  likewise 
characteristic  of  the  modern  use  of  salesmen.  /Because  of  the 
large  expenditure  involved  in  the  use  of  advertising  and  per- 
sonal salesmen,  they  can  be  used  most  economically  in  the 

'This  is  said  not  to  be  true  of  many  farm  products,  especially  fruits 
and  vegetables.  Laws  in  fourteen  states  fixing  standards  for  barrelled 
apples  and  six  for  boxed  apples  show  that  these  standards  were  set 
according  to  production  conditions  and  not  to  the  needs  of  buyers. 
For  this  reason  it  has  been  impossible  to  fix  national  standards  for 
these  products.  (Letter  from  the  U.  S.  Bureau  of  Markets  and  Crop 
Estimates.) 

8  The  importance  of  this  phase  of  standardization  was  discussed  in 
Chap.  VI. 


402  PRINCIPLES  OF  MARKETING 

sale  of  a  large  volume  of  similar  products.  This  is  especially 
true  when  the  unit  value  is  not  great.  To  put  it  in  another 
way,  modern  large  scale  methods  of  selling,  both  advertising 
and  the  use  of  salesmen,  are  too  expensive  to  use,  unless  they 
can  be  employed  to  sell  standardized  products. 

The  Container  and  Standards. — An  important  adjunct  to 
the  sale  of  goods  standardized  by  the  producer  and  known 
to  the  trade  by  his  name  or  trade  symbol  is  the  container. 
In  this  connection  the  container  commonly  serves  three  im- 
portant purposes:  (1)  jtjprevents  physical  deterioration;  (2) 
it  prevents  substitution  or  adulteration  of  the  contents;  (3)  it 
serves  as  a  means  of  carrying  marks  of  identification  which 
aid  the  consumer  in  purchasing  the  product.y  The  identifica- 
tion, furthermore,  helps  to  prevent  the  substitution  of  com- 
peting goods  by  supply  houses]  \These  uses  of  the  container 
are  particularly  important  with  goods  which  cannot  be  made 
to  carry  any  identifying  mark,  such  as  sugar,  flour,  and  liquids.  \ 
The  use  of  standard  containers  which  are  recognized  over  a 
wide  area  makes  it  possible  to  place  goods  in  packages  as  soon 
as  they  are  ready  for  market,  since  they  need  not  be  changed 
to  other  containers  in  case  they  do  not  go  to  the  market  to 
which  they  were  first  expected  to  be  sent.  [A  standard  con- 
tainer also  standardizes  the  quantity  element  in  a  transac- 
tion, since  buyers  can  know,  without  trial,  what  quantity  a 
given  standard  container  holds.  x, 

Methods  of  Standardization.-(-Some  products  are  easily 
standardized.  This  is  true  of  most  products  fashioned  by 
machines — screws,  bolts,  cloth)  Goods  of  this  ^character  are 
standardized  as  they  come  from  the  machine.  (Some  goods 
have  to  be  assorted  in  order  to  be  standardized.  This  is  par- 
ticularly true  of  farm  products,)  in  which  there  are  sometimes 
great  variations  in  quality  and  size.  And  in  order  to  obtain  the 
benefits  of  standardization,  standards — commonly  called  grades 
— have  to  be  established  and  the  goods  assorted  into  lots  which 
conform  to  these  standards.  Fruits  and  vegetables  and  wool 
are  standardized  in  this  way.  In  the  sale  of  grains  the  stand- 


STANDARDIZATION  403 

ards  set  are  also  known  as  grades.  ((Grains,  however,  are  not 
conveniently  sorted  so  as  to  conform  to  these  grades.  But  since 
the  grain  from  a  single  grower  or  even  a^  particular  territory 
tends  to  be  uniform,  sorting  is  not  essential.  Quantities  in  bulk 
are  sampled  and  the  grade  of  the  bulk  is  determined  by  inspect- 
ing the  sample  to  see  to  what  standard  (grade)  it  conforms. 

Advertising  and  Branding  Standardized  Goods.-^Adver- 
tising  and  branding  are  important  means  of  selling  the  stand- 
ardized products  of  individual  producers.  ^  Advertising,  or 
other  selling  effort,  tends  to  establish  in  the  minds  of  prospec- 
tive customers  an  idea  of  character  and  quality.  The  cus- 
tomer on  finding  an  article  that  satisfies  is  enabled  to  pur- 
chase it  again,  because  it  has  been  branded  for  that  very 
purpose.  (Branding,  consequently,  eventually  renders  the 
purchase  of  the  ordinary  articles  of  every  day  consumption 
relatively  easy  for  the  average  consumer.  True,  a  great 
many  competing  producers  are  endeavoring  to  get  him  to 
try  their  product,  but  in  proportion  to  the  great  bulk  of  his 
purchases  changes  are  few.  It  has  been  shown  that  modern 
methods  of  selling  would  be  very  costly  and  often  unsuccessful 
were  the  products  sold  not  standardized.10  /On  the  other  hand, 
the  economies  of  large  scale  standardize^  production  would 
be  impossible  were  no  large  market  created  by  the  sales  force 
and  advertising,  and  were  it  not  for  the  additional  fact  that 
the  good  will  thus  created  inheres  in  the  brand  and  so  renders 
repeat  orders  less  costly  to  obtain.  / 

Not  All  Standardized  Goods  Sold  by  Description. — The 
fact  that  a  product  has  been  divided  into  groups  and  classified 
as  conforming  to  certain  standards  does  not  mean  that  sale  by 

"They  may  also  be  used  in  the  sale  of  agricultural  specialties  by 
growers'  associations — as  the  California  citrus  fruit,  walnut,  and  raisin 
growers,  New  England  cranberry  growers — or  of  classes  of  manufac- 
tured products,  such  as  cement  and  lumber,  in  the  creation  of  a  demand 
for  which  competing  manufacturers  cooperate. 

10 See  P.  T.  Cherington,  The  Elements  oj  Marketing  (1920),  Chap. 
XIV,  and  H.  B.  Vanderblue,  "The  Marketing  Function  of  Advertis- 
ing," Advertising  and  Selling,  June  5,  1920,  pp.  16-18. 


404  PRINCIPLES  OF  MARKETING 

/description  thereby  becomes  possible^  Raw  materials  cannot, 
as  a  rule,  be  so  closely  standardized  as  to  make  this  possible.  ) 
Variations  in  the  natural  conditions — soil,  moisture,  climate — '• 
which  affect  quality  and  size  are  too  great,  and  within  very 
wide  limits  are  beyond  human  control.  This  is  particularly 
true  of  farm  products.1^  Thus,  when  wheat  is  purchased  by 
mills,  samples  are  very  closely  examined  to  determine  whether 
the  grain  is  exactly  suited  to  the  purpose  in  hanji)  There  is 
usually  a  slight  difference  in  the  price  paid  in  the  spot  market 
for  different  lots  of  grain  of  the  same  grade.  It  is  only  in  the 
"future"  market,  i.  e.,  in  speculation  and  hedging,  that  tsales 
of  farm  products  by  description  prevail.  With  manufactured 
products,  on  the  other  hand,  much  more  use  of  sale  by  de- 
scription is  often  possible.  Faith  in  the  integrity  of  the 
selling  party  being  assumed,  the  extent  to  which  sale  by 
description  can  be  made  depends  upon  the  extent  to  which 
the  standards  conform  to  the  needs  of  the  purchaser,  and  on 
the  extent  to  which  the  goods  conform  to  the  standards  set. 
This  conformity  is  usually  much  more  exact  with  manufac- 
tured products  than  with  those  of  the  farm,  forest,  and  mine. 

The  Need  for  Standards. — The  extension  of  universally  ac- 
cepted standards  of  quality  should /go  far  to  make  market- 
ing more  efficient  and  less  costly.  (  Quality  is  the  unknown 
factor  in  most  mercantile  transactions.  It  must  be  determined 
before  sale  occurs.  Standard  weights  and  measures  eliminate 
the  difficulties  involved  in  knowing  what  quantities  are  ex- 
changed. /'Buyer  and  seller  can  thus  come  to  an  immediate 
agreement  on  that  score;  and  in  case  of  dispute  recourse  can 
be  had  to  an  impartial  judge  in  the  standard  scale  or  standard 
measure.12  (The  medium  of  exchange,  i.  e.,  price-measure,  is 

u  Nevertheless,  the  growing  knowledge  on  the  part  of  farmers  of  the 
importance  of  raising  commodities  which  meet  the  market  needs  is 
bringing  a  far  greater  degree  of  standardization  than  formerly  existed, 
and  has  tended  to  improve  greatly  the  general  quality  of  the  goods 
produced. 

13  These  are  not  completely  standardized  in  the  United  States.  There 
are,  for  instance,  forty-three  legal  bushels  by  weight  (the  Winchester 


STANDARDIZATION  405 

also  standardized,  so  that  both  buyer  and  seller  know  definitely 
what  the  terms  of  sale  are  to  be  when  a  price  is  agreed  upoiv 
But  the  common  lack  of  standards  of  quality  makes  neces- 
sary a  process  of  bargaining  between  buyer  and  seller  which 
is  cumbersome  and  expensive. 

CWith  consumption  goods,  and  particularly  with  those  which 
are  manufactured,  this  expense  is  largely  borne  by  the  seller 
— manufacturer  or  middleman — who  endeavors  through  adver- 
tising, salesmanship,  and  other  selling  devices  to  convince  the 
buyer  that  the  quality  and  characteristics  of  his  product  best 
meet  the  buyer's  needsy  In  the  case  of  unstandardized  prod- 
ucts this  process  of  convincing  the  buyer  of  the  quality  of  the 
product  must  take  place  every  time  the  goods  are  resold. 
This  indicates  also  that  in  the  case  of  products  which  are 
amenable  to  standardization  a  grade  should  be  established  as 
near  the  original  source  as  possible.13 

If  the  quality  of  a  product  could  be  definitely  known,  as 
the  result  of  an  impartial  measurement  of  its  quality  and  of 

bushel  of  quantity,  2150.42  cubic  inches,  is  the  one  standard),  and  dis- 
honest weights  are  frequent.  But  relatively,  at  least,  the  above  is  true. 
Hampers,  baskets,  tin  cans  and  other  containers  for  both  farm  and 
manufactured  products  are  far  from  uniform.  Progress  is  being  made, 
however,  by  governmental  action  and  by  associative  effort. 

13  "In  fact  many  dealers  as  well  as  shippers  insist  that  instead  of 
having  official  inspectors  at  receiving  points  it  would  be  of  more 
benefit  in  preventing  waste  and  loss  if  Federal  inspectors  were  located 
at  all  shipping  points  to  inspect  the  quality,  grade,  and  quantity 
of  all  produce  shipped.  It  is  claimed  that  such  an  inspection  system, 
working  with  a  nationally  established  plan  of  standard  grades  and  uni- 
formly recognized  sizes  of  packages,  would  prevent  rejection  without 
just  grounds  as  well  as  does  the  present  system,  and  in  addition  would 
better  protect  the  dealer  who  buys  f.o.b.  loading  station.  It  would 
also  make  easier  the  collection  of  damages  for  injury  in  transit.  The 
exact  grade,  Nos.  1,  2,  or  3,  etc.,  could  be  marked  or  stenciled  plainly 
on  the  package  by  the  inspector.  Under  such  a  plan  the  purchasing 
dealer  would  be  in  a  position  to  know  just  what  he  is  buying,  and 
eventually  all  foodstuffs  would  be  sold  according  to  the  quality  or  con- 
dition."— Report  oj  the  Federal  Trade  Commission  on  the  Wholesale 
Marketing  oj  Food  (1919),  p.  82. 


406  PRINCIPLES  OF  MARKETING 

its  peculiarly  favorable  or  unfavorable  characteristics  in  use, 
a  large  part  of  modern  selling  effort  could  be  eliminated.  In- 
spection by  the  buyer  would  become  less  arduous;  and  the 
mere  puffing  of  one's  wares  as  superior  to  those  of  another 
would  then  be  confined  to  an  endeavor  to  make  the  pur- 
chaser believe  he  needs  a  product  with  certain  characteristics 
rather  than  other  commodities  which  will  gratify  other  wants 
— that  he  needs,  for  example,  an  automobile  rather  than  a 
yacht,  OF  a  $2,500  automobile  rather  than  a  $600  one.  Once 
the  buyer  has  decided  that  question  he  would  be  able  to  de- 
termine for  himself — on  the  basis  of  grades  or  recognized  de- 
scriptions of  quality — just  which  product  meets  his  need. 
From  the  consumer's  point  of  view  it  might  even  be  well  if 
he  could  be  left  alone  in  making  the  whole  decision. 

What  Has  Been  Done. — Obviously  the  ideals  which  have 
been  presented  cannot  be  completely  realized.  Nevertheless, 
much  that  is  here  suggested  is  already  in  operation  in  the 
marketing,  of  certain  products  and  much  more  can  be  done 
with  advantage. 

State  and  Federal  laws  have  been  passed  to  standardize 
weights  and  measures  and  to  bring  about  greater  uniformity 
therein.  (Great  progress  has  been  made  in  grading  the  physical 
characteristics  of  commodities.  The  grading  of  agricultural 
products  by  associative  action  and  by  the  state  and  Federal 
governments  is  becoming  widespread.  Standards  already  es- 
tablished are  being  employed  over  wide  areas,  and  more  is 
being  done  toward  the  extension  of  their  use.14  State  food 
a.nr Mrug  ffcpfl.rtnr\enta  flre_  analyzing  patent  medicines,  as  well 
as  foods,  and  helping  the  consumer  to  know  what  he  is  buy- 
ing and  what  physical  values  he  is  getting  for  his  money.)  In 
many  lines  semi-monopoly  has  resulted  in  a  limitation  of  kinds 
of  products  put  on  the  market,  and  that  of  itself  simplifies 
the  consumer's  purchasing  problem.  (Trade  associations  have 
attempted  to  establish  standards,  such  for  example,  as  the 

14  See  Harold  W.  Samson,  The  March  of  Standardization,  Separate  No. 
850,  from  U.  S.  Department  of  Agriculture  Yearbook,  1920. 


STANDARDIZATION  407 

meaning  of  certain  terms  as  applied  to  mechanical  devices, 
hardwood  lumber,  colors,  fabrics,  and  the  like.^ 

(A  large  number  of  engineering  societies  have  interested 
themselves  in  the  establishment  of  standards.  One  of  the  most 
important  of  these  is  the  American  Society  for  Testing  Ma- 
terials. It  is  organized  to  cover  a  wide  field  including  "struc- 
tural timber,  steel  for  all  purposes  including  railway  rolling 
stock,  rails,  structures,  and  castings  of  all  kinds,  standard 
magnetic  tests  of  iron  and  steel,  copper  for  electrical  and  other 
purposes,  bronze,  cement,  fire  proof  materials,  road  materials, 
paint,  coal.')  Nearly  forty  standing  committees  exist  to  facili- 
tate this  work.  /In  order  to  coordinate  the  work  of  various 
societies  five  national  engineering  societies  have  organized  thej 
American  Engineering  Standards  Committee  and  the  United 
States  Bureau  of  Standards  now  covers  a  wide  field  in  assisting 
to  establish  such  standards.15 

The  grading  of  attributes  of  products  is  more  difficult.  This 
is  due  to  the  fact  that  individuals  differ  greatly  in  the  man- 
ner in  which  the  attributes  or  services  of  products  appeal  to 
them.  There  will  always  be  personal  likes  which  react  dif- 
ferently, even  to  standardized  products.  This  fact  renders 
possible  much  of  the  competitive  selling  of  goods — the  pitting, 
for  example,  of  Smith's  soap  against  Brown's  and  the  rest 
of  the  field.  Since  the  consumer  does  not  know  just  what 
qualities  and  attributes  of  many  kinds  of  products  appeal 
most  to  him,  and  since  different  consumers  are  differently  af- 
fected, vendors  find  it  is  advisable  to  differentiate  their  prod- 
ucts from  competing  goods.  If  the  differentiated  product  ap- 
peals to  buyers,  good  will  can  be  created  for  itN  *Then,  with 
the  product  differentiated  and  standardized,  the  "demand  thus 
created  can  be  satisfied  only  by  the  purchase  of  this  particular 
product. 

15  See  C.  A  Adams,  "Industrial  Standardization,"  Annals  of  the  Amer- 
ican Academy,  Vol.  LXXXII  (March,  1919),  pp,  289-399.  Other  articles 
on  standards  aiso  appear  in  this  volume. 


CHAPTER  XX 
COMPETITION  AND  PRICES 


The  matter  of  fundamental  interest  in  the  market  is  price. 
Buyers  and  sellers  alike  are  constantly  watching  prices — the 
central  facts  in  the  market.  The  consumer  seeks,  in  the  end, 
service  and  quality;  but  service  and  quality  being  what  they 
are  at  a  time,  price  is  the  point  of  interest  to  him.  To  the 
producer — manufacturer,  mine  operator,  farmer — the  price 
received  for  his  product,  a  given  volume  assumed,  measures 
his  margin  above  or  below  unit  costs.  Or  price  may  de- 
termine his  volume  of  sales,  and  if  his  expenses  vary  with  the 
volume  of  sales  or  with  the  scale  of  production,  prices  will  have 
varying  effects  on  the  ultimate  net  profit.  For  the  merchant, 
price  determines  the  margin  on  which  he  must  operate  in  any 
given  transaction,  and  the  markets  in  which  he  can  buy  and 
sell.  (Both  producer  and  middleman  are  interested  in  prices, 
not  only  as  determining  their  volume  of  sales  and  margins 
of  profit,  but  also  because  they  determine  the  expense  of 
doing  business  as  shown  in  the  price  of  raw  materials,  ma- 
chinery, labor,  funds,  land,  and  services — the  costs  which 
must  be  met  if  the  business  is  to  continue.  ^)  And  the  uncer- 
tainty, which  surrounds  these  prices  and  the  prices  at  which 
the  goods  produced  are  sold,  determines  the  margin  of  profit 
above  expenses  which  business  men  must  make  in  order  to  con- 
tinue to  carry  on  their  particular  operations.  That  is,  when 
prices  are  uncertain  this  margin  must  be  great  enough  over  a 
period  of  time  to  offset  the  losses  which  occur.  Thisjpeai 

408 


COMPETITION  AND  PRICES  409 

that  when  the  risk  of  changing  prices  is  great  higherjgricea^ 
must  prevail.1 

"""Price  Defined. — The  price  oLan  article  is  its  market  value 
expressed  in  terms  of  monev^  TMarket  value  is  power  in  ex- 
changeJ  The  price  of  an  article,  or  service,  therefore,  is  an 
expression  in  terms  of  monetary  units  of  the  power  which  that 
article  exercises  in  exchange  on  the  market,  i.  e.,  of  the  money 
it  will  "buy,"  and  hence,  ultimately,  of  goods  and  services 
for  which  it  can  be  exchanged. 

This  is  not  the  place  to  go  into  the  intricacies  of  price 
theories  as  developed  in  treatises  on  economics.  Important 
as  such  studies  are,  they  must  be  assumed  here,  and  our  pur- 
pose must  be  served  by  a  brief  summary  of  the  chief  con- 
clusions which  are  generally  accepted  by  students  of  the  sub- 
ject. A  summary  of  this  kind  will  serve  as  a  background  for 
the  more  specific  study  of  market  price  which  is  the  subject 
of  the  following  chapter.  This  purpose  will  be  effected  by  re- 
viewing briefly  how  prices  affect  the  production  and  the  con- 
sumption of  goods  and  services.2 

Competitive  Prices. — In  modern  industrial  countries  prices 
are  generally  determined  under  competitive  conditions.  And 
although  no  price,  perhaps,  is  determined  on  a  purely  com- 
petitive basis — because  of  various  kinds  of  friction  which  keep 
the  normal  competitive  tendencies  from  complete  operation 
—(it  is  nevertheless  true  that  the  main  influences  upon  prices 
are  operating  under  competitive  conditions.  3  It  is  therefore 
important  to  summarize  the  manner  in  which  prices  would 
be  determined  in  a  purely  competitive  regime.  This  will  also 
serve  to  make  clear  the  nature  of  competition.  The  various 

*See  Theodore  Macklin,  Efficient  Marketing  for  Agriculture  (1921), 
pp.  326-327,  and  F.  H.  Knight,  Risk,  Uncertainty  and  Profit  (1921). 

2  For  a  more  detailed  study  the  student  is  referred  to  the  standard 
texts  upon  economic  principles  and  to  such  references  as  may  be  given 
therein.  Among  the  more  accessible  of  these  are  the  texts  written  by 
Clay,  Ely,  Fisher,  Seager,  Taussig,  and  Taylor.  Professor  Alfred  Mar- 
shall's discussion  of  value  and  price  in  his  Principles  of  Economics, 
Book  V,  is  generally  considered  the  best  presentation  of  the  subject. 


410  PRINCIPLES  OF  MARKETING 

elements  which  tend  to  counteract  the  competitive  determina- 
tion of  prices  can  then  be  summarized. 

In  a  smoothly  operating  competitive  regime  the  prevailing 
price  would  be  one  which  would  bring  on  the  market  at  any 
time  just  that  volume  of  goods  which  would  'be  bought  at 
a  price  sufficient  to  cover  the  expenses  of  production,  i.  e., 
the  expense  of  making  and  distributing  the  product,  in  addi- 
tion to  a  net  income  to  the  business  man  sufficient  to  make 
him  continue  his  efforts.  If  prices  fell  below  this  point,  pro- 
duction would  be  immediately  decreased  and  the  volume  of 
goods  reaching  the  market  would  be  reduced.  As  the  avail- 
able supply  was  reduced  some  purchasers — because  of  their 
intense  desire  for  the  commodity — would  bid  a  higher  price 
for  it  in  order  to  get  the  share  of  the  now  reduced  supply 
which  they  desired.  This  increased  competition  among  the 
buyers  with  the  more  intense  desire  would  eventually  force 
prices  up  to  a  point  which  would  cover  the  expense  of  produc- 
tion. If  prices  became  higher  than  the  expense  of  production, 
production  would  be  increased — because  producers  would  de- 
sire to  take  advantage  of  this  opportunity  to  secure  greater 
profits — and  a  greater  volume  would  be  offered  for  sale.  This 
would  continue  until  the  competition  of  producers — coupled 
with  the  declining  intensity  of  demand  for  the  product  on 
account  of  the  increased  supply — again  forced  prices  down  to 
the  cost  point. 

(When  prices  are  low  consumers  tend  to  buy  more,  when 
prices  are  high  they  tend  to  buy  less;  when  prices  are  high  more 
is  produced,  when  prices  are  low  production  is  curtailed.  With 
both  production  and  consumption  sensible  to  price  changes  the 
volume  of  goods  offered  and  the  volume  which  is  purchased 
change  as  prices  change.  Thus,  as  prices  rise,  demand  (con- 
sumption) tends  to  fall  off;  but  the  supply  offered  tends  to 
increase  and  more  production  is  called  forth,  because  large 
profits  can  be  made  at  the  prevailing  prices.  When  prices  fall 
below  expenses  of  production,  demand  (consumption)  tends  to 
increase  because  of  the  reduced  price;  supply,  however,  tends 


COMPETITION  AND  PRICES  411 

to  fall  off  and  production  is  curtailed,  because  profits  are  small 
or  do  not  exist^X  That  is,  a  high  or  a  low  price,  in  relation 
to  expenses  of  production  and  to  previous  prices,  has  an  effect 
on  both  consumption  and  production — on  demand  and  supply. 
Varying  Costs  of  Production. — Up  to  this  point  it  has 
been  assumed  that  costs  of  production  are  uniform  for  all  units 
of  the  product.  This  would  perhaps  be  true  did  competitive 
conditions  work  themselves  out  smoothly  and  quickly.3  Mn 

ii^by 


fact,  however,  in  industry  as  it  is,  nogtg  ^f  production 
nn  mrnnr  unifnrn[ir  .hut  vary Y^s__bgtw©ee-preducers ;  and  the 
same  producer  may  have  different  costs  of  production  under 
unlike  circumstances,  and  with  varying  volumes  of  production. 
In  the  end,  it  is  the  price  which  consumers  will  pay  that  de- 
termines the  volume  of  production.  IllhaLprice  is  high,  and 
if  an  enlarged  supply  is  demanded  which  can  be  had  only  at 
increasing  costs,  then  the  higher  cost  production  will  be  called 
forth  by  the  high  prices  offered.  But-4£-buyers  will  not  pay 
high  prices,  the  high  cost  production  is  eliminated.  /Or,  if 
looked  at  from  the  consuming  side,  should  prices  be  high,  many 
consumers  will  be  forced  out  because  they  cannot,  or  will 
not,  pay  them.  Demand  is  thereby  lessened,  the  supply  be- 
comes relatively  greater,  and,  with  declining  prices,  the  goods 
produced  at  a  high  cost  will  have  to  be  sold  at  a  loss.)  ( This 
will  continue  until  some  portion  of  the  higher  cost  produc- 
tion is  withdrawn,  when,  with  the  supply  smaller  than  before 
and  with  the  demand  relatively  larger,  consumers  with  the 
more  intense  desires  will  compete  for  the  smaller  supply  and 
the  expenses  of  the  remaining  high  cost  producers  will  be 
met.  On  the  other  hand,  if  the  demand  of  consumers  is 
greater  than  the  supply,  some  of  them  will  bid  the  price  up. 
This  will  allow  the  higher  cost  production  to  come  in,  thereby 
increasing  the  supply.*/ 

3  See  F.  H.  Knight,  "Cost  of  Production  and  Price  over  Long  and 
Short  Periods,"  The  Journal  of  Political  Economy,  Vol.  XXIX,  No.  4, 
(April,  1921),  pp.  304-335. 

4  If  expenses  of  production  increase  as  individual  producers  increase 


412  PRINCIPLES  OF  MARKETING 

Diagram  VII  suggests  the  influence  which  competition  tends 
to  have  upon  price,  through  the  action  of  producers  and  buy- 
ers. The  conditions  shown  more  nearly  conform  to  the  facts 
as  they  are  likely  to  exist  in  the  actual  market,  for  if  com- 
petition were  affecting  these  conditions  as  we  have  assumed, 
the  dotted  lines  and  the  solid  line  would  be  one.  That  is,  pro- 
duction facts  and  purchase  facts  would  be  known  by  all  in- 

Price  Lines ^"^^  '"'""''' 

Cost  Line          ^X "^•vN.."^'"      ^X. .,*"     ~?^*'' 


DIAGRAM  VII. — Effect  of  Competition  on  Prices. 

NOTE:  The  broken  lines  indicate  prices,  one  of  which  changes  more 
rapidly  than  the  others,  but  with  smaller  fluctuations.  When  the  lines 
are  above  the  cost  line,  relatively  low  production  is  indicated — a  con- 
dition leading  to  increased  production,  unless  demand  declines.  When 
the  price  line  is  below  the  cost  line,  relatively  large  production  is  indi- 
cated— a  condition  leading  to  reduced  production,  unless  demand  in- 
creases. 

terested  parties,  and  consequently  the  supply  placed  upon  the 
market  would  always  be  just  that  which  would  be  taken  ("de- 
manded" in  the  economists'  terminology)  at  the  cost  price. 
The  cost  line  as  a  straight  line  indicates  a  single  uniform 

their  volume  of  production,  an  enlarged  demand  will  tend  to  bring 
more  individual  producers  into  the  market,  rather  than  to  cause  an 
enlarged  production  on  the  part  of  existing  producers.  If  expense 
decreases  as  individual  producers  increase  the  volume  of  their  produc- 
tion, an  increased  demand  will  induce  existing  producers  to  enlarge 
their  operations,  rather  than  to  call  new — and  probably  high  cost — 
producers  into  the  market.  Production  will  be  "large  scale."  If  ex- 
penses are  constant,  either  may  happen,  although  existing  producers  can 
usually  expand  more  rapidly  and  with  less  risk  than  can  new  and 
inexperienced  producers.  No  matter  what  is  the  general  tendency  in 
an  industry,  it  is  usually  true  that  high  cost  and  low  cost  producers 
are  found.  In  the  long  run  the  high  cost  producers  tend  to  be  weeded 
out,  either  by  becoming  low  cost  producers  themselves — through  imitat- 
ing low  cost  producers,  or  themselves  improving  methods — or  because 
they  are  eliminated  by  the  competition  of  the  low  cost  producers. 


COMPETITION  AND  PRICES  413 

cost.  As  has  been  shown,  this  assumption  seldom  conforms 
to  the  facts. 

Some  Causes  for  Variations  from  the  Normal. — But  the 
conditions  as  outlined  up  to  this  point  are  by  no  means  fully 
realized  on  the  market;  on  the  contrary,  wide  variations  are 
found.  /Supply  is  not  readily  and  quickly  adjusted,  made 
larger  oV  smaller  at  the  will  of  producers ;  and  the  news  of  the 
market,  i.  e.,  of  the  facts  of  demand  and  supply,  is  neither 
so  widespread  nor  so  accurate  as  was  assumed.  In  fact,  with 
the  exception  of  prices  fixed  by  custom  or  the"aictates  of  con- 
venience and  of  certain  partially  controlled  prices — monopoly 
prices  and  prices  fixed  by  the  government-Ahe  reason  for  the 
failure  of  prices  to  conform  closely  to  cost  of  production  rests 
finally  on  the  failure  of  our  market  news  to  indicate  these 
facts  accurately  and  quickly.5")  For  if  the  market  could  be 
gauged  far  enough  in  advance  (it  would  have  to  be  for  years 
in  the  case  of  goods  produced  by  modern  roundabout  methods 
of  production)  prices  would  conform  very  closely  to  costs. 
Then  producers  could  forecast  markets  accurately,  and  their 
efforts  would  be  so  well  distributed  in  the  production  of  the 
various  goods  and  services  desired,  that,  in  the  absence  of 
monopoly,  the  interaction)  of  supply  and  demand  for  all 
products  would  result  in  a  cost  (or  normal)  price  for  all  of 
them  all  of  the  time.  I  Just  in  so  far  as  such  news  is  made 
available  are  large  speculative  gains  and  losses  eliminated, 
or  at  least,  their  magnitude  is  reduced.6^/ 

Two  Types  of  Price. — So  slowly,  in  fact,  is  correct  market 
news  disseminated,  and  so  rapid  are  the  changes  that  actually 
take  place  from  time  to  time  in  the  factors  that  affect  the 
immediate  demand  for  products  and  their  supply,  that  eco- 
nomists sometimes  speak  of  two  kinds  of  prices  as  existing 
under  a  competitive  regime.  fOne  of  these  is  the  market  price 
or  the  actual  price  which  prevails  from  day  to  day^(The 

5  See  Chap.  XVIII. 

6  This  will  be  more  fully  discussed  in  Chap.  XXI ;  see  also  Theodore 
Macklin,  Efficient  Marketing  for  Agriculture  (1921),  pp.  306-312. 


414  PRINCIPLES  OF  MARKETING 

other  is  the  normal  price,  that  is,  the  price  which  tends  to 
prevail  over  a  period  of  time,  and,  hence,  the  price  which  will 
bring  upon  the  market  just  that  supply  for  which  purchasers 
will  pay  enough  to  cover  the  expenses  involved  in  production 
and  marketing.7^ 

Fundamental  Importance  of  Demand  and  Supply. — All 
the  market  forces  which  one  can  think  of — monopoly  power, 
custom,  advertising  and  selling,  speculative  dealing,  govern- 
ment regulation  of  price  and  service,  and  consumptive  regu- 
lation— are  important  as  they  affect  demand  or  supply,  or 
both;  and  are  important  in  the  market  chiefly  as  they  have 
such  effects.  But  modifying  influences,  such  as  those  just 
mentioned,  are  found  in  the  determination  of  all  market  prices, 
and  consequently  tend  constantly  to  keep  them  from  being  at 
one  with  normal  price. 

\JJormal  price  really  represents  a  minimum  and  a  maximum 
price.  It  is  the  cost  price,  below  which  prices  cannot  go  for 
any  long  period  of  time  if  production  is  to  continue.  It  is 
likewise  the  price  above  which  prices  are  not  likely  to  con- 
tinue for  long,  if  competitors  are  free  to  come  into  the  field 
when  prices  rise. )  This  is  true  because  the  increased  profits  of 
high  prices  would  lead  to  greater  production.  Such  a  result 
would  cause  increased  competition  among  sellers  and,  in  the 
end,  lower  prices.  The  actual  market  situation  is  such,  how- 
ever, that  in  varying  degrees  supplies  do  continue  to  come  on 
the  market  at  less  than  cost  for  long  periods  of  time ; 8  and,  on 
the  other  hand,  in  varying  degrees  producers  are  not  free  to 
come  into  the  field  when  prices  rise  above  costs.  The 'more 

7  It  is  this  price  which  is  apparently  in  mind  in  many  discussions  of 
a  "fair  price,"  particularly  by  farm  and  trade  associations.    See  Mack- 
lin,  op.  cit.,  pp.  324-325,  333;  and  H.  C.  Adams,  A  Description  of  In- 
dustry (1918),  p.  167;  also  P.  W.  Ivey,  Principles  of  Marketing  (1921), 
pp.  226-227. 

8  This  is  well  illustrated  by  the  losses  manufacturing  firms  have  been 
taking  during  the   present   period   of  readjustment.    They  have   con- 
tinued to  operate,  though  often  at  a  loss.     See  also  pp.  352-354  and 
pp.  380-381. 


COMPETITION  AND  PRICES  415 

fundamental  of  those  conditions  which  affect  actual  market 
prices  are  the  subject  of  the  remainder  of  this  preliminary 
discussion. 

II 

On  the  assumption  that  all  prices  tend  toward  the  normal 
price  of  their  kind,  i.e.,  toward  cost  of  production,  it  remains 
to  explain  ^some  of  the  mnr^e  important  conditions  which  tend 
to  keep  actual"  market  prices  from  rea< 

cuiidlllOiib  I'iin  be,  jumiiirTrized:  (1)  the  failure  to  prop- 
erly forecast  market  tendencies,  (2)  monopoly,  (3)  govern- 
ment^ control,  and,  tmally,  (4)  custom  and  convenience! 

(i)  Speculative  Prices. — Speculative  prices  prevail  through  - 
out  the  business  world.  In  a  sense,  all  prices  are  speculative, 
because  knowledge  of  the  actual  conditions  which  will  prevail 
on  the  market  at  a  future  date,  near  or  distant,  is  never  com- 
plete. Even  the  most  perfect  news  service  cannot  report 
the  many  possible  changed  situations  that  may  arise  between 
the  time  the  .market  is  forecasted  ami  the  time  the  pro- 
spective exchange  actually  takes  place.  /Not  only  may  changes 
occur  in  conditions  affecting  production,  such  as  an  im- 
provement in  methods  resulting  in  cheaper  processing  or  better 
products,  or  both,  but  changes  in  demand  likewise  arise. 
A  panic,  a  war,  a  "dry"  law,  a  cyclone,  a  new  product  or 
method,  may,  one  or  all,  alter  the  nature  and  amount  of  the 
demand  for  goodsJ  The  interaction  of  market  forces  is  so  com- 
plex and  the  apparently  extraneous  circumstances  which  have, 
nevertheless,  a  'considerable  effect  are  so  many,  -that -a*  ac- 
curate estimate  of  market  conditions  which  will  prevail  at  a 
future  date  is  often  practically  impossible.  This  is  true,  of 
course,  especially  of  articles  which  require  long  periods  of  time 
for  their  production,  or  of  articles  for  which  the  demand  is 
more  or  less  precarious  and  elastic — as  with  seasonal  style 
goods.  These  conditions  prevail  to  a  large  degree  in  the 
market  for  most  machine-made  products,  and  similar  prob- 
lems arise  in  the  market  for  farm  products.  /There  are,  con- 
sequently, likely  to  be  alternating  gains  and  losses  on  the 


416  PRINCIPLES  OF  MARKETING 

market.  These  result  from  over-  or  under-estimation  of  the 
market  demand  or  supply,  and  cause  gain  or  loss,  greater  or 
less  according  as  the  estimates  are  more  or  less  remote  from 
the  actualities.  ) 

(2)  Monopoly.— ^Monopoly  affects  price  from  the  side  of 
supply.9  It  implies  control  of  the  price  at  which  goods  will  be 
offered  for  sale^  (This  arises  from  the  unified  control  of  the 
supply  of  a  product  or  service,  as  when  the  government  has 
a  monopoly  of  the  postal  service./  or  grants  to  some  pro- 
ducer through  the  patent  or  copyright  privilege  the  exclusive 
control  of  the  sale  of  certain  products;  or  as  found  when 
a  given  entrepreneur  or  a  group  of  cooperating  entrepreneurs 
control  a  limited  supply  of  raw  material,  such  as  anthracite 
coal,  diamonds,  iron/  ore,  or  of  a  finished  product,  such  as 
gasoline  or  sugar.  (In  cases  of  this  kind,  although  the  monop- 
olist cannot  dictate^prices  at  which  the  consumer  will  buy  as 
is  sometimes  assumed,  it  is  true  t^hat  he  can  fix  the  price  at 
which  the  goods  can  be  purchased. ) 

But  the  power  which  the  monopolist  is  able  to  exercise 
over  the  price  he  will  charge  for  his  product  varies  greatly 
under  different  conditions.  It  may  usually  be  assumed  that 
the  ordinary  monopolist  desires  profit.  For  that  purpose 
he  has  produced  goods  or  obtained  possession  of  them  or 
of  services.  (  But  profit  necessitates  sales,  and  so  he  wants  to 
sell.  The  amount  which  he  can  charge  individual  purchasers 
is  nb\nmjfily  limited^  aT  theextreme,  by  theiFpurchasing  power. 
Witnm  this  limit,  determined  by  consumer  purchasing  power, 
the  price  which  the  monopolist  can  charge  and  yet  sell  his 
product  will  be  limited  by  (1)  the__elasticity_or_jnelasticity 
of  JJie  consumer  demand,  (2)  the  ease  with  which  other 
products  can  be  substituted  for  the  monopolized  product,  and 

9  The  term  is  also  used  to  include  control  from  the  demand  side. 
Thus  Ely  describes  monopoly  as  "combination  and  unified  action,  sig- 
nifying restraint  on  the  free  offering  of  commodities  and  services  by  rival 
sellers  and  on  the  free  purchase  of  these  commodities  and  services  by 
rivals  who  desire  to  secure  them." — R.  T.  Ely,  Outlines  of  Economics 
(3d  ed.,  1917),  p.  190r 


COMPETITION  AND  PRICES  417 

(3)  the  fact  that  the  government  may  interfere  if  prices  are 
too  High. 

TEeelasticity  of  consumer  demand  is  determined  both  by 
the  intensity  of  desire  and  the  extent  of  the  income.  If 
salt  could  be  monopolized,  as  it  has  been  at  times,  the  in- 
elasticity of  the  demand  would  make  it  possible  for  the 
monopolist  to  raise  the  price  to  unheard  of  heights.  And 
there  would  be  no  limit,  save  his  resources,  to"  what  the  con- 
sumer would  pay  for  water  if  it  were  monopolized.  If  sugar, 
on  the  other  hand,  were  monopolized,  although  consumers 
might  pay  a  much  larger  share  of  their  income  for  it  than 
they  are  now  in  the  habit  of  paying,  a  point  would,  neverthe- 
less, be  reached  where  they  would  go  without  sugar,  substi- 
tuting corn  syrup,  maple  sugar,  or  other  sweets;  or  if  need 
be  they  might  even  go  without  sweets  of  any  kind.  If  the 
necktie  market  were  monopolized  and  prices  raised,  a  point 
would  be  reached  relatively  soon  at  which  consumers  would 
begin  to  go  without  neckties.  Social  custom  might  induce  one 
to  pay  exorbitant  prices,  but  there  are  many  other  things  for 
which  the  desire  is  so  intense  that  one  would  give  up  neckties 
rather  than  go  without  those  more  desirable  things. 

Consumer  Desires  Limit  Monopoly .y-The  fundamental 
limitation  to  monopoly  price,  as  to  all  prices,  is  the  consumer 
demand./  Individual  consumers  have  different  incomes  and 
different  desires.  J\i  desire  is  not  intense  a  high  price  can- 
not be  charged,  or  else  consumers  will  go  without./  A  few 
may  have  a  very  great  desire  for  the  product,  others  a  mod- 
erate desire,  and  yet  others  no  desire  at  all.  The  last  can- 
not be  induced  to  buy  at  any  price;  the  first  will  buy  at  a 
very  high  price;  those  with  moderate  desires  will  purchase 
only  when  the  price  is  low,  because  their  desire  is  so  lim- 
ited that  a  point  is  soon  reached  at  which  they  obtain  greater 
satisfaction  in  spending  the  same  part  of  their  income  in 
other  directions.  /But  consumer  desire  is  limited  in  its  market 
influence  by  consumer  income^  Desire  may  be  very  great, 
but  the  amount  which  each  can  spend  is  obviously  limited 


418  PRINCIPLES  OF  MARKETING 

by  his  income,  so  that  a  very  high  price  would  in  any  case 
shut  out  those  whose  income  was  small.10 

The  ideal  monopoly  price — that  which  will  bring  the  mo- 
nopolist the  greatest  net  income — must  be  determined  with 
such  considerations  in  view.  For  most  products  the  choice 
must  lie  between  (1)  high  price  and  high  unit  profit,  but  a 
small  number  of  sales,  and  (2)  many  sales  on  a  small  unit 
margin  of  profit.  This  is,  of  course,  a  statement  of  the  price 
problem  as  met  by  many  sellers,  but  the  ordinary  seller  must 
make  his  price  conform  closely  to  the  market  price,  or  else  his 
competitors  will  undersell  him.  /The  monopolist,  on  the  other 
hand,  controls  the  total  supply  of  his  product  and  has  no  such 
competitive  limitations.  He  can  chajga  what  price, he^  will ; 
and  he  will  not,  cannot,  beundersofS  His  price  problem  liTtO) 
use  this  power  so  as  to  secure  the  largest  net  return.  / 

Determining  Monopoly  Price. — In  order  to  gain  the  great- 
est profit  the  monopolist  .must  dejermine  what  price  will  give 
thegreatest  rnarginbetweentotal  expense  ancQotal  income. 
In  doing  this  heTTaslittle  definite  knowledge  with  which  to 
start.  He  may  know  his  costs  of  production  and  selling;  al- 
though if  it  is  a  business  of  increasing  or  decreasing  expense 
he  cannot  know  even  this  with  accuracy.  But  he  does  not 
know  what  reaction  he  will  receive  from  the  consumer  at  dif- 
ferent prices,  except  after  trial.  Of  course,  if  he  is  wise,  he 
will  study  his  market  so  as  to  estimate  the  best  price,  but 
aside  from  that  he  must  experiment.  Probably  few  monopo- 
lists, if  any,  have  ever  hit  upon  the  best  price  for  their  article, 
and  if  they  did,  the  price  would  be  but  temporarily  the  best, 
for  conditions  affecting  expenses,  demand,  wants,  and  income 

™/A  monopolist  may  sometimes,  however,  charge  different  prices,  and 
so  take  advantage  of  different  incomes.  This  is  most  feasible  when  the 
product  can  be  varied  to  give  different  degrees  of  quality  to  the  same 
fundamental  product.  Two  familiar  illustrations  are  the  sale  of  books 
in  different  bindings  and  at  different  prices,  and  the  sale  of  phonographs 
at  varying  prices. /In  each  case  an  appeal  is  made  to  different  buying 
strata  by  changes  which  are  confined  primarily  to  finish,  or  "quality." 


COMPETITION  AND  PRICES  419 

are  constantly  changing.  Furthermore,  undoubtedly  many 
firms  possessing  a  monopoly,  or  even  a  degree  of  monopoly, 
have  not  tried  to  exercise  their  power  to  the  limit.  This, 
ignoring  any  more  altruistic  motive  which  may  influence  them, 
is  on  account  of  their  fear  that,  if  their  monopoly  does  not  rest 
on  some  exclusive  privilege,  competitors  will  be  induced  to 
enter  this  market,  that  substitution  will  take  place,  or  else  for 
fear — generally  in  the  case  of  important  commodities  of  every 
day  use — that  popular  indignation  will  force  the  government 
to  take  a  hand. 

Semi-Monopoly  Power  Common  in  Competitive  Lines. — 
In  the  competitive  market  somewhat  of  monopoly  power  is 
exercised  as  a  result  of  the  demand-creative  efforts  of  pro- 
ducers, coupled  with  the  force  of  custom  or  habit  on  the  part 
of  consumers.  When  a  consumer  is  in  the  habit  of  purchas- 
ing at  a  certain  store  it  often  takes  a  considerable  induce- 
ment in  price  or  service  to  make  him  change.  Again,  he  may 
have  bought  a  particular  brand  of  goods  for  years,  and  when 
the  price  is  raised  he  will  continue  to  buy  it,  although  if  he 
were  coming  into  the  market  for  the  first  time  he  might  re- 
fuse absolutely  to  pay  so  high  a  price./  The  seller,  through 
national  advertising,  local  advertising/ the  use  of  salesmen, 
or  the  cooperation  of  middlemen,  creates  in  the  buyer  a  de- 
sire to  buy  his  particular  brand  of  product,  and  just  in  so  far 
as  he  is  able  to  induce  buyers  to  ask  for  and  insist  on  getting 
his  product  he  has  a  monopoly  of  his  market./ 

Influence  of  this  sort  does  not,  it  is  true,  usually  carry  with 
it  any  large  influence  over  prices.  For  if  the  price  is  much 
higher  than  the  price  of  competing  products,  the  buyer  is 
likely  to  purchase  the  competitor's  goods.  But  so  long  as 
price  and  quality  remain  approximately  the  same,  the  created 
demand  will  .combine  with  the  established  custom  as  well  as 
with  the  desire  of  the  purchaser  and  assure  to  the  seller  his 
marketl  It  is  this  fact  which  makes  effective  the  large  part 
of  selling  effort.  That  is,  once  the  customer  is  won  over,  he 


420  PRINCIPLES  OF  MARKETING 

ordinarily    continues    to    buy    that    product  over  and  over 
again.11 

It  is  *these  "repeat  sales"  that  make  economical  much  of 
modern  selling.  Take  chewing  gum  as  an  extreme  example. 
Over  $3,000,000  is  reported  to  have  been  spent  on  advertising 
last  year  by  one  manufacturer.  At  a  selling  price  of  a  penny 
a  stick  that  was  the  equivalent  of  the  market  price  of  300,- 
000,0,00  sticks  of  gum — three  for  every  inhabitant  of  the  coun- 
try. /  Advertising  on  this  scale  is  profitable  only  if,  when 
once^;  sale  is  made,  "repeat"  sales  follow).  The  cost  of  the 
initial  sale  is  gradually  spread  over  the  later  sales.  The  later 
sales  are  made  because  after  the  consumer  was  induced  to 
make  the  first  purchase,  and  found  the  product  satisfactory, 
a  smaller  sales  effort,  or  none  at  all,  was  required  to  procure 
each  additional  sale. 

(3)  Government  Control  and  Operation  of  Monopoly. — 
It  is  plain  that  the  monopolization  of  a  necessity  of  life  may 
prove  to  be  a  very  terrible  power  over  the  pocketbooks  and 
even  the  lives  of  consumers.  Monopolies  of  goods  or  ser- 
vices of  peculiar  importance  to  the  welfare  of  the  general 
public,  consequently,  are  often  owned  by  the  government  ]/ 
and  usually  are  at  least  subject  to  its  control  over  rates  and 
service.  Tffip  nperptm™  n^  p^hli^jijjlitiPpjF.  naturnlly  monnpo 
Iisj<i37  because  it  involves  the  economies  of  large  scale  pro- 
duction, including  the  elimination  of  the  wastes  of  duplicate 
competing  plants,  and  because  certain  monopoly  privileges 
in  the  form  of  franchises,  such  as  the  permission  to  use  public 
highways,  are  an  essential  element  in  operation/  /These  are 
usually  controlled  to  protect  consumers  againsl^xtortionate 
prices,  and  to  assure  extensions  of  the  service  to  parts  of 
the  community  where  it  should  go  but  where  a  private  firm 
might  not  find  profit  in  extending  it,/ and  so  where  it  would 
not  be  carried  if  no  control  were  exercised. 

11  This  is  usually  called  good  will.  The  protection  of  this  good  will 
is  the  basis  of  the  price-maintenance  argument,  discussed  in  Chap.  XXII. 


COMPETITION  AND  PRICES  421 

(4)  Customary  and  Convenient  Prices.— ^Competitive 
prices  are  also  limited  by  custom  and  convenience.  Deal- 
ers become  used  to  charging  certain  prices,  and  consumers 
become  used  to  paying  them,  and  whether  expenses  go  up  or 
down,  often  within  wide  limits,  prices  remain  the  same/  This 
is  especially  true  of  retail  prices,  which  by  no  means  conform 
to  the  many  and  frequent  changes  in  wholesale  prices/  A 
grocer  may  sell  a  pound  of  coffee  at  forty-five  cents  for  years, 
whereas  the  actual  price  he,  or  his  jobber,  pays  may  vary 
nearly  every  week;  but  very  often  only  a  considerable  change 
in  the  wholesale  price,  which  appears  to  be  relatively  perma- 
nent, will  induce  him  to  change  the  retail  price.  Shoes  of  cer- 
tain manufacturers  were  advertised  for  years  at  established 
prices,  but  despite  the  rising  costs  of  recent  years  it  was  not 
until  the  upheaval  in  expenses  resulting  from  the  World  War 
that  changes  were  made.  General  prices  mounted  for  some 
time  before  a  change  was  made  in  the  price  for  a  shave  or 
haircut.  Such  customary  prices  are  often  hard  to  explain, 
But  they  make  marketing  much  simpler  to  both  seller  and 
consumer  and  help  to  decrease  price  bargaining  in  small  pur- 
chases— through  making  more  evident  the  one-price-to-all 
policy.  They  eliminate  bargain  hunting  for  the  products 
and  services  of  ordinary  consumption.  Customary  price  is 
convenient  to  the  dealer  and  to  his  customers.12 

12  See  also  pp.  426,  436-438. 


CHAPTER  XXI 
MARKET  PRICE 


In  the  last  chapter  an  attempt  was  made  to  summarize 
what  may  be  called  the  long-time  tendencies  of  market  price. 
In  this  chapter  some  more  specific  considerations  of  market 
price  will  be  discussed. 

It  has  been  shown  that  in  the  longj^un^pricps  t.pncLto^con- 
^Jorm  to  costs  of  production.  This  tendency  is  particularly 
manifest  under  competitive  conditions.  That  is,  market  price 
tends  toward,  or  fluctuates  about,  normal  (cost)  price,  unless 
a  deterrent  force — monopoly  or  some  scheme  of  market  con- 
trol, for  example — prevails.  At  a  time,  however,  costs  of  pro- 
duction have  little  to  do  with  determining  market  price.  For 
the  strength  of  the  existing  demand  of  buyers  sets  an  upper 
limit  above  which  the  price  cannot  go,  regardless  of  costs. 
Furthermore,  market  prices  tend  constantly  to  change,  as  a 
result  of  the  variation  in  knowledge  of  fundamental  conditions 
possessed  by  traders,  the  strength  of  consumer  desire,  and  the 
need  of  sellers  to  realize  on  their  merchandise.  At  any  one 
time,  the  estimates  which  traders  make  of  conditions  of  de- 
mand and  supply,  present  and  future,  determine  the  actual 
demand  and  supply  which  is  effective  in  the  market — whether 
they  reflect  the  true  potential  conditions  or  not.  The  extent 
to  which  these  estimates  are  correct  over  given  periods  de- 
termines how  closely  market  prices  will  conform  to  costs,  as 
well  as  the  range  of  fluctuations  in  prices  over  shorter  periods. 

Price  Limits. — In  the  whole  range  of  prices  from  producer 
to  consumer,  it  has  been  shown  that  certain  fairly  definite 

422 


MARKET  PRICE  423 

ultimate  limits  exist.  The  lower  limit  to  price  is  the  expense 
of  production  and  marketing  of  the  highest  cost  producers 
and  distributors  whose  products  and  services  are  demanded.1 
The  upper  limit  is  the  price  buyers  will  pay  for  an  existing 
supply.  These,  however,  are  simply  normal  price  limits  which 
are  effective  over  a  period  of  time.  Market  price  may  go 
above  the  latter  limit,  and  below  the  former.  But  if  it  does 
go  above  the  latter,  demand  will  be  decreased,  the  full  ex- 
isting supply  cannot  be  sold,  and  prices  must  drop  in  the  end, 
if  the  total  consumer  demand  remains  unchanged.2  That  is, 
there  will  usually  be  some  demand  at  the  higher  price  but  not 
enough,  so  that  in  the  end  some  products  (of  the  existing  sup- 
ply) will  have  to  be  offered  at  lower  prices  to  be  sold.  If 
prices  go  below  the  cost  of  production  a  part  of  the  existing 
supply  is  likely  to  be  withheld,3  and  if  in  the  end,  it  must  be 
sold  at  a  price  too  low  to  satisfy  the  producer,  the  ultimate 
result  will  be  a  reduction  in  further  production,  perhaps  even 
the  destruction  of  part  of  the  existing  supply.4 

Importance  of  Retail  Prices.— In  the   final   analysis  the 
prices  which  sellers  can  charge  are  determined  in  the  retail 

1  See  F.  W.  Taussig,  "Price-Fixing  as  Seen  by  a  Price-Fixer,"  Quarterly 
Journal  oj  Economics,  Vol.  XXXIII  (1919),  pp.  205-241. 

2  It  often  happens  in  the  wheat  market,  for  example,  that  the  visible 
supply  and  the  receipts  at  a  particular  market  are   unusually  small. 
This  condition,  or  either  one  separately,  if  demand  is  normal,  or  un- 
usually large,  will  often  force  prices  up  temporarily. 

3  This  is  normally   assumed,   but   is   not   always   true.     It  has   been 
frequently  noted  that  on  a  falling  market  holders  become  panic  stricken 
and  hasten  to  sell  so  as  to  avoid  what  they  fear  may  be  a  greater  loss. 
This  of  course   accentuates  the   decline.    Farmers   frequently   do  this 
when  the  price  of  grain  falls  sharply. 

4  There  may  be  direct  destruction,  but  it  is  more  likely  to  take  the 
form  of  plowing  under  a  crop,  failure  to  harvest,  or  failure  to  market 
the  crop,  and  a   decline  in  future   production.    Since   the   increase   in 
freight   rates  many  examples  have  been  cited   of  perishable   products 
consigned  to  markets  and  sold  at  prices  which  did  not  cover  the  freight 
charges.    See    Economic    Conditions,    Governmental    Finance,    United 
States  Securities,  the  monthly  letter  of  the  National  City  Bank,  New 
York,  March,  1921,  p.  3. 


424  PRINCIPLES  OF  MARKETING 

\ 
market.     It  is  true  of  retail  prices  as  of  other  prices  that 

the  cost  of  production  (including  marketing  costs)  sets  a  lower 
limit  below  which  they  cannot  go  for  long  if  production  is 
to  continue.  If  expenses  are  not  met  the  retailer  or  jobber 
will  fail,  or  if  they  do  obtain  their  margin  (above  the  price 
they  pay)  out  of  low  priced  goods,  prices  to  producers  will 
be  so  low  that  they  will  refuse  to  produce  more.  On  the  other 
hand,  the  strength  of  consumer  demand  determines  an  upper 
limit  to  retail  prices,  and  ultimately  an  upper  limit  to  prices 
all  along  the  line  back  to  the  producer,  as  well  as  to  prices  for 
production  goods  and  equipment.  It  is  true  that  under  our 
modern  "one-price"  system  of  quoting  retail  prices  an  indi- 
vidual buyer  must  usually  take  or  leave  an  article  at  the 
quoted  price.  He  buys  or  not  according  to  his  income  and  to 
the  manner  in  which  the  price  fits  into  his  personal  scale  of 
values.  But  in  the  end  prices  are  limited  by  the  demand  of 
consumers  in  the  mass.  If  prices  are  so  high,  for  example, 
that  enough  buyers  will  not  come  into  the  market  to  take  the 
total  supply  offered  at  a  given  price,  the  price  must  come  down 
before  all  of  that  supply  can  be  sold.5  It  follows,  therefore, 
that  in  the  long  run  it  is  the  retail  price  which  sets  upper 
limits  to  prices  at  all  preceding  points,  and  that  price  is 
determined  by  the  reaction  of  consumers. 

Retail  Price  Determination. — These  conditions  which  have 
been  described  simply  set  long  time  limits.  The  prices  which 
are  charged  in  retail  stores  are  not  determined  directly  by 
them.  These  are  set  in  various  ways:  (1)  at  a  certain  "mark- 
up" above  cost,  (2)  by  custom  or  convenience,  (3)  by  an 
estimate  of  what  the  most  satisfactory  price  will  be,  (4)  at  a 
price  suggested  by  the  manufacturer,  (5)  as  a  result  of  price 
understandings  with  competing  stores,  and  (6)  by  following 
the  prices  set  in  competing  stores. 

(1)  The  "Mark-up" — A  common  method  of  setting  retail 

5  It  is  these  phenomena  which  economists  describe  in  explaining  "mar- 
ginal utility"  and  "marginal  vendibility."  See  F.  W.  Taussig,  Principles 
of  Economics  (3d  ed.  revised,  1921),  Chap.  X. 


MARKET  PRICE  425 

prices  is  to  add  a  normal  "mark-up"  for  the  particular  line 
of  goods  to  which  a  product  belongs.  This  mark-up  is  added 
to  the  cost  of  the  goods  to  the  store  and  normally  includes 
the  estimated  cost  of  selling  that*  particular  class  of  goods 
plus  such  profit  as  the  store  decides  that  it  should  make.6 
These  normal  mark-ups  may  be  accepted  throughout  a  par- 
ticular trade,  or  they  may  apply  to  a  store  as  a  whole,  to 
particular  departments,  to  particular  lines,  or  to  individual 
commodities. 

A  price  set  in  this  way,  however,  is  always  tentative — to  be 
raised  or  lowered  as  market  conditions  dictate.  If  there  seems 
to  be  a  very  great  demand,  the  price  may  be  increased.  If 
demand  falls  off,  the  price  may  be  reduced  in  order  to 
stimulate  further  demand.  Retailers  do  not,  however,  always 
reduce  prices.  They  may  increase  their  sales  efforts,  or 
they  may  simply  accept  the  small  demand  for  a  particular 
article  and  make  no  effort  to  increase  it.  In  the  latter  case 
they  will  thereafter  reduce  the  volume  of  purchases  to  cor- 
respond to  sales,  or  refuse  to  buy  additional  stocks.  In  the 
merchandising  of  staple  lines  purchases  are  easily  adjusted 
to  sales  in  this  way.  Stocks  can  be  held  and  slowly  sold  at 
the  price  marked.  But  with  style  goods  or  with  staples  which 
are  a  considerable  part  of  a  merchant's  line  this  is  not  a  wise 
policy.  If  staple  goods  are  a  considerable  part  of  a  mer- 
chant's line,  or  his  complete  stock — for  example,  shoes,  drugs, 
groceries — and  his  prices  are  too  high,  the  effect  is  obvious. 
Style  goods  are  usually  bought  in  advance  of  the  season, 
and  if  they  do  not  move  at  the  desired  price  something 
drastic  must  be  done  at  once  to  get  them  on  the  market. 
Unlike  staple  lines  they  cannot  be  held  over;  for  as  time 
passes  they  come  to  correspond  less  and  less  to  the  demands 
of  the  market,  and  so  the  longer  they  are  held,  the  greater 
the  ultimate  loss  that  must  be  taken.  If  a  greater  demand 
cannot  be  created,  lower  prices  must  be  fixed.  Goods  which 

6  Some  of  the  common  costs  and  gross  profits  in  various  retail  lines 
will  be  found  on  pp.  509,  515-516. 


426  PRINCIPLES  OF  MARKETING 

are  physically  perishable  present  much  the  same  problem. 
The  low  "Saturday  night"  prices  for  tomatoes,  peaches,  and 
strawberries  are  often  accounted  for  in  this  way. 

(2)  Customary    and    Convenient    Prices. — In    addition    to 
normal  mark-ups  in  given  lines  or  departments  there  prevail 
in  many  trades  more  or  less  customary  or  convenient  prices.7 
Prices  can  be  named  and  change  made  more  conveniently  in 
"even  money."     Again  when  a  price  has  prevailed  for  some 
time  both  seller  and  buyer  come  to  take  it  for  granted.     With 
such  goods  large  variations  in  the  wholesale  price  may  cause  no 
change  in  the  retail  price.     Furthermore,  if  the  wholesale  price 
increases  to  a  point  which  nets  no  profit  to  the  dealer  it  is 
by  no  means  uncommon  for  him  to  solve  the  problem  by  dis- 
continuing the  product,  or  at  least  not  to  feature  it,  rather 
than  to  raise  the  price. 

(3)  Price  Estimating. — The  retailer,  like  the  manufacturer, 
sets  many  prices  by  estimating  the  price  which  will  bring  the 
best  returns.     He  may  do  this  by  comparison  with  similar 
goods  in  his  own  store  and  with  the  prices  charged  by  com- 
petitors.    His  supply  houses  may  advise  him.      And    many 
stores  depend  to  a  large  degree  upon  the  judgment  of  com- 
petent clerks  and  department  managers.8 

(4)  Suggested  Prices. — In  the  sale  of  many  branded  and 
advertised  products,  the  resale  price  is  set  by  the  manufac- 
turer.9    So  long  as  the  retailer  abides  by  the  manufacturer's 
price  decision  he  is,  of  course,  unable  to  influence  sales  through 
any  change  in  prices.     The  manufacturer  has  taken  that  into 
his  own  hands.     Ultimately,  however,  the  same  forces  which 
would  cause  individual  dealers  to  change  their  prices  will  force 

7  See  p.  421.    For  an  interesting  account  of  a  practice  of  this  kind,  and 
its  effect   on   the   prices   charged   by   manufacturers   and   jobbers,   see 
U.  S.  Tariff  Board,  Report  on  Cotton  Manufactures,  Vol.  2,  pp.  532-570 
(62d  Cong.  2d  Sess.  [1911-1912],  House  Docs.,  Vol.  133,  Ser.  No.  6315). 
This  is  a  discussion  of  customary  factors  in  pricing  cotton  textiles. 

8  This  is  sometimes  called  "eye-value."    See  Paul  W.  Ivey,  Principles 
of  Marketing  (1921),  pp.  229-230. 

9  See  Chap.  XXII. 


MARKET  PRICE  427 

the  hand  of  the  manufacturer.  Local  conditions  of  demand 
will  not  be  so  well  calculated,  but  widespread  conditions  are 
probably  better  calculated  in  this  way — since  the  manufac- 
turer is  in  a  better  position  to  study  the  wider  market  influ- 
ences. In  other  cases  the  manufacturer  does  not  insist  on 
the  maintenance  of  prices  but  suggests  the  price  to  the  retailer, 
or  perhaps  prints  a  retail  price  on  the  article  or  its  container. 

(5)  Price  Understandings. — Another  common  method  of  de- 
termining retail  prices  is  to  set  them  in  consultation  directly  or 
indirectly  with  other  dealers.    This  is  thought  to  be  very  com- 
mon with  staple  products  which  are  not  branded,  such  as  coal, 
sugar,  and  lumber.    Uniform  prices  sometimes  result  from  un- 
derstandings brought  about  through  local  retail  associations. 
Since  there  is  little  variation  in  the  quality  of  generally  recog- 
nized grades  of  such  products  it  is  evident  that  the  consumer 
can  shop  for  them  and  buy  them  in  the  cheapest  place.     This 
of  itself  would  lead  to  uniform  prices.    But  "shopping"  of 
this  kind  also  leads  to  excessive  competition  among  merchants, 
to  avoid  which  the  retailers  may  consult  with  one  another 
to  determine  a  common  price  or  normal  mark-up. 

It  should  not  be  concluded,  however,  that  the  existence  of 
common  prices  in  all  stores  selling  a  particular  commodity  is 
the  result  of  an  understanding  between  the  stores.  A  condi- 
tion of  free,  untrammelled  competition  with  large  knowledge  of 
the  market  also  causes  uniform  prices  to  emerge.  It  is  very 
common,  for  example,  for  housewives  to  go  from  store  to 
store  comparing  prices,  and  "shoppers"  sent  out  from  stores  are 
constantly  visiting  competing  stores  to  compare  the  price  and 
quality  of  merchandise. 

(6)  Following  Competitors'  Prices. — The  last  sentence  sug- 
gests another  means  by  which  prices   are   frequently   fixed. 
Many  stores  determine  their  prices   from  the  prices  which 
competitors  are  charging.     A  single  store  often  takes  the  in- 
itiative and  others  follow — marking  their  prices  at,  above,  or 
below  the  competing  price,  according  to  their  general  policy. 
This  may  be  a  conscious  process  on  the  part  of  the  stores 


428  PRINCIPLES  OF  MARKETING 

who  imitate,  or  it  may  result  indirectly  from  their  endeavor 
to  set  prices  in  relation  to  competing  prices  on  a  basis  which 
experience  has  shown  to  be  wise.  But  since  some  stores  are 
quicker  to  sense  fundamental  market  conditions  than  are  their 
competitors  they  come  to  set  the  pace  and  the  others  follow.10 
It  is  understood  to  be  fairly  common  for  middle  class  and 
cheaper  department  stores  to  follow  rather  closely  the 
prices  offered  in  the  basement  of  the  "high  class"  department 
stores. 

Even  when  stores  do  not  consciously  follow  a  leader  in  this 
way — even  when  they  themselves  lead — they  nevertheless  fol- 
low prices  in  competing  stores,  and  gather  valuable  informa- 
tion of  their  competitors  from  their  own  customers  and  from 
supply  houses.  Although  a  merchant  has  a  definite  way  of 
determining  the  prices  at  which  he  will  offer  his  merchandise 
for  sale — such  as  cost  plus  a  definite  mark-up — he  must  usu- 
ally consider  the  prices  prevailing  in  competing  stores  and, 
within  the  limits  which  his  experience  and  judgment  show  to 
be  necessary,  price  his  own  goods  so  that  they  will  compete 
successfully.  Each  store  ordinarily  watches  its  competitors 
with  great  care.  In  this  way  it  is  able  to  learn  what  com- 
petitors are  doing  and  prepare  to  meet  in  some  way  any  ad- 
vantages which  their  prices,  merchandise,  or  service  may  have 
in  the  eyes  of  buyers,  before  the  buyers  themselves  are 
aware  of  them.  To  the  extent  that  this  is  true  it  can  be  said 
that  each  merchant  sets  his  prices  to  meet  the  prices  of  his 
competitors. 

10  It  is  quite  common  among  manufacturers  just  as  among  retailers  to 
follow  recognized  leaders  in  the  trade.  The  United  States  Steel  Cor- 
poration in  the  steel  industry,  the  Reading  Coal  Company  in  the 
anthracite  coal  industry,  the  Standard  Oil  Company,  the  American 
Sugar  Refining  Company,  and  other  large  producers  are  closely  watched, 
and  their  prices  are  followed  by  their  smaller  competitors.  Even 
where  there  are  no  outstanding  organizations,  like  those  in  the  cases 
cited,  there  are  usually  one  or  two  firms  which  are  recognized  as  leaders 
in  the  trade  and  whose  policies  in  regard  to  prices  are  quite  generally 
followed. 


MARKET  PRICE  429 

How  Prices  Evolve. — There  is,  thus,  really  no  beginning  or 
end  of  the  price-setting  process.11  Each  vendor  watches  his 
competitors.  Furthermore,  even  when  prices  are  determined 
independently  of  competitors,  truly  new -prices  are  seldom  set, 
because  the  price-setting  process  is  continuous.  The  prices  to 
be  charged  for  each  new  stock  of  merchandise,  as  well  as  for 
existing  stocks,  are  built  upon  the  prices  which  have  prevailed 
in  the  past  for  the  same  or  similar  merchandise.  These  are 
modified  only  as  the  seller's  knowledge  of  the  market  dic- 
tates. Seldom  is  a  price  built  up  anew.  Prices  once  estab- 
lished tend  to  continue,  until  some  new  condition  exists — in 
fact  or  in  anticipation — which  induces  the  seller  to  make  a 
change.  This  is  especially  true  of  retail  trade,  in  which 
market  influences  are  much  slower  to  affect  prices  than  in 
the  wholesale  trade.12 

II 

Just  as  in  the  last  analysis  all  prices  are  limited  by  what 
the  final  consumer  will  pay  for  finished  goods,  so  on  the  other 
hand  the  price  which  must  be  paid  for  production  goods  and 
equipment,  as  well  as  for  consumption  goods,  in  order  to  bring 
them  on  the  market,  is  determined  by  the  price  at  which  a 
sufficient  number  of  producers  can  be  induced  to  devote  their 
efforts  and  resources  to  production.  But  the  prices  which  are 
offered  to  producers  at  any  particular  time  do  not  necessarily 
bear  an  immediate  relation  to  that  price.  They  are  de- 
termined very  largely  by  the  immediate  conditions  of  demand 
and  supply,  as  manifested  in  actual  offers  and  bids  in  the 
market. 

Producers'  and  distributors'  costs,  it  has  been  shown,  set 
lower  limits  to  prices — limits  below  which  prices  cannot  long 
prevail  if  production  is  to  continue  undiminished.  But  it  has 
also  been  indicated  that  the  market  price  which  is  paid  in  a 
competitive  market,  at  any  one  time,  is  determined  by  other 

"See  Wesley  C.  Mitchell,  Business  Cycles  (1913),  pp.  27-32. 
12  For  the  reasons  for  this  see  pp.  436-438. 


430  PRINCIPLES  OF  MARKETING 

forces.  Costs  affect  it  only  as  they  may  influence  sellers  to 
offer  or  withhold  merchandise.  The  influence  of  buyers  (con- 
sumers) in  determining  upper  limits  has  also  been  disclosed. 
But  how  are  the  actual  prices  quoted  in  the  market  de- 
termined? Three  general  classes  of  merchandise  have  been 
distinguished  in  previous  discussions:  production  goods,  equip- 
ment, consumption  goods.  Somewhat  different  conditions  sur- 
round the  pricing  of  each.13 

Prices  of  Production  Goods. — Raw  materials  are  produc- 
tion goods  in  the  sale  of  which  demand  creation  is  unim- 
portant. This  is  the  case  because  they  sell  "at  the  market." 
That  is,  a  market  price  common  to  all  products  of  a  given 
grade  prevails,  and  the  producer  cannot  normally  modify  this 
price  through  efforts  at  demand  creation.  He  can  affect  it  only 
by  diminishing  the  supply  offered  on  the  market,  i.  e.,  through 
withholding  a  part  of  the  existing  supply  or  through  reducing 
the  production  of  future  supplies.  These  conditions  are  not, 
of  course,  confined  to  raw  materials,  for  with  any  product 
sold  solely  on  the  basis  of  known,  determinable,  material  quali- 
ties, it  is  possible  for  buyers  to  test  these  qualities,  or  have 
them  tested,  for  themselves.  Manufactured  products  which 
are  sold  as  production  goods  for  further  manufacture,  or  as 
parts  to  be  assembled,  are  similar  in  this  regard  to  raw  ma- 
terials, since  they  are  largely  purchased  on  specification  or 
by  grade.14 

Prices  of  Consumption  Goods. — Very  different  conditions 
exist  in  the  marketing  of  products  for  use  in  personal  con- 
sumption and  for  equipment.  With  these  the  producer,  within 
broad  limits,  sets  his  price.15  There  is  no  definite  market 
price  at  which  the  products  of  different  sellers  are  sold  or 
offered.  On  the  supply  side  products  can  be  withheld  from 

13  Only  one  of  these,  consumption  goods,  is  sold  at  retail. 

14  See  pp.  93-96. 

15  Such  are  the  prices  set  by  cranberry  associations  and  walnut  growers 
to  open  the  season,  and  the  "bids"  which   machinery   manufacturers 
make  to  buyers,  and  their  catalogue  prices,  as  well  as  most  retail  prices. 


MARKET  PRICE  431 

the  market  or  production  can  be  reduced.  But  the  price  of 
these  commodities — in  contrast  with  most  production  goods — 
can  be  influenced  on  the  demand  side  as  well,  by  the  creation, 
modification,  or  diversion  of  demand.  It  is  possible  for  the 
vendor  of  consumption  goods  to  do  this  because  the  intangible 
elements  in  the  appeal  of  his  product  cannot  be  definitely 
measured  and  graded.  His  product,  furthermore,  is  bought  in 
small  quantities,  and  by  those  who  usually  have  not  the  ability 
and  surely  not  the  time  to  test  carefully  even  the  material 
qualities  of  a  product. 

Prices  of  Equipment. — Many  of  the  same  considerations 
which  apply  to  the  sale  of  production  goods,  apply  to  the 
sale  of  equipment,  but  in  a  smaller  degree,  because  it  is  fre- 
quently impossible  to  determine  in  advance  the  relative  per- 
formance value  of  competing  equipment.  And  this  introduces 
demand  creation  as  an  important  factor  in  making  sales. 
In  the  case  of  new  equipment  which  a  producer  or  merchant 
has  never  used  before,  demand  must  be  created  for  the  new 
service.  Equipment  goods  of  this  kind  are  called  specialties: 
typewriters,  adding  machines,  cash  registers,  mimeograph  ma- 
chines, etc.,  when  first  introduced  were  of  this  class.  Further- 
more, many  of  these  are  bought  by  inexpert  buyers  and  in 
small  volume,  so  that  the  comparison  with  consumption  goods 
often  holds  at  this  point  as  well. 

No  Definite  Market  Price  for  Consumption  Goods  and 
Equipment. — There  is,  consequently^  no  definite  market  price 
jar  most,  glasses  of  consumption  goods  and  equipment.  And 
so  the  price~~wnlch  tlte  vendor  sets  is  in  the  nature  of  a 
trial  price,  i.  e.,  he  estimates  the  best  price  at  which  he  can 
sell  his  product,  and  then  tries  it  out  on  the  market  to  de- 
termine whether  his  estimate  (or  guess)  is  right.  With  the 
development  of  the  one-price  policy  in  wholesale  as  well  as 
in  retail  sales  this  estimate  has  assumed  large  significance,16 
since  price  cannot  be  modified  to  meet  the  conditions  which 

16  It  is  even  more  important  when  the  manufacturer  determines  retail 
prices. 


432  PRINCIPLES  OF  MARKETING 

develop  in  individual  transactions.  The  price  prevails  through- 
out a  market  and  the  value  sense  of  individual  buyers  must 
conform  thereto,  or  be  made  to  conform,  if  sales  are  to  result. 
But  the  best  of  sales  efforts  cannot  effect  this  end  if  the 
price  is  too  far  out  of  line  with  the  valuation  which  the  bulk 
of  buyers  place  upon  the  merchandise. 

It  is  in  this  connection  that  Shaw  points  out  that  a  vendor 
may  sell  at,  above,  or  below  the  prevailing  market  price  for 
similar  goods.17  The  price  he  determines  upon  depends  in 
large  part  on  the  kind  of  sales  appeal  which  is  to  be  used.  If 
the  product  is  to  be  sold  very  largely  on  a  quality  basis, 
it  may  be  sold  at  a  higher  price  than  the  usual  market  price 
for  similar  merchandise,  and  quality  can  be  emphasized  and 
price  ignored  or  minimized  in  the  sales  appeal.  If  the  goods 
are  to  be  sold  at  less  than  the  market,  the  manufacturer  is 
very  likely  to  place  great  emphasis  upon  the  low  price,  i.  e., 
to  sell  on  a  "price  basis."  In  selling  "at  the  market,"  he  may 
emphasize  both  price  and  quality  if  he  so  desires,  although 
the  price  argument  cannot  be  made  particularly  strong  unless 
the  quality  is  superior  to  that  of  competing  goods  selling 
at  the  same  price,  or  unless  other  manufacturers  are  selling  on 
a  quality  basis  at  the  "market  plus." 

It  is  not  meant  to  imply  that  when  products  are  priced 
at  the  "market  plus,"  with  quality  emphasized  and  price 
minimized  in  the  sales  effort,  that  the  vendor  tries  to  sell  at 
a  price  which  is  higher  than  the  quality  warrants.  There  is, 
nevertheless,  a  probability  that  the  cost  of  producing  this 
added  quality  is  proportionately  less  than  the  increase  in 
price.  But  the  difference  is  not  necessarily  profit.  It  may 
go  largely  into  the  cost  of  the  increased  sales  efforts  which 
selling  on  a  "quality  basis"  commonly  imposes.  But  larger 
unit  profits  do  often  obtain,  particularly  when  sales  are  made 

"As  he  expresses  it,  prices  may  be  at  the  "market  par,"  "market 
plus,"  or  "market  minus."  See  A.  W.  Shaw,  An  Approach  to  Business 
Problems  (1916),  Chap.  XV. 


MARKET  PRICE  433 

to  so-called  "high  class"  trade.  The  volume  of  trade,  how- 
ever, may  suffer. 

This  possibility  of  ^emphasizing  price  in  some  caseg^and 
quality  in  others  and,  possibly  conversely,  ignoring  price  in 
some  and  ignoring  quality  in  others,  arisesfrom_three__funda- 
mental  conditions,  j^hich  have  been  previously  emphasized: 
(1)  the~Tack  of  recognized  standard  grades  covering  all  im- 
portant characteristics  of  the  product,  (2)  the  inability  of 
consumers  to  compare  competing  goods,  and  (3)  the  fact  that 
the  same  characteristics,  in  both  consumption  goods  and 
special  equipment,  appeal  differently  to  different  consumers.18 
The  inability  of  consumers  to  compare  competing  goods  arises 
from  their  lack  of  skill  and  their  failure  to  take  sufficient 
time  to  analyze  carefully  and  compare  the  characteristics  of 
competing  products,  but  the  different  reactions  to  identical 
products  must  be  traced  to  the  difference  in  individual  tastes 
and  characteristics  and  to  variations  in  incomes.  The 
different  features  emphasized  in  the  sale  of  competing  motor 
cars  illustrate  these  points,  and  a  rather  extreme  case  is  found 
in  the  publicity  efforts  of  two  cigarette  manufacturers,  one 
advertising  its  product  as  "all  Turkish"  tobacco,  the  other 
advertising  its  product  as  having  "just  enough"  Turkish. 
Manufacturers  of  equipment,  likewise,  recognize  these  con- 
ditions by  their  efforts  to  add  "improvements"  to  basic  mech- 
anisms, and  by  producing  several  models. 

Consumer  Demand  Limits  Prices. — The  price  which  con- 
sumers are  willing  to  pay  for  a  given  supply  has  an  effect  on 
all  previous  prices,  which  tend  to  be  less  than  that  price 
by  the  normal  margins  of  the  sellers  in  each  preceding 
market.19  Although  it  is  true  that  particular  prices  tend  to 
be  determined  from  wholesale  prices,  wholesale  prices  really 
only  reflect  conditions  of  supply  and  demand.  These  are 

18  See  especially  Chap.  VII  and  Chap.  XIX. 

19  See  Theodore  Macklin,  Efficient  Marketing  for  Agriculture  (1921), 
p.  322. 


434  PRINCIPLES  OF  MARKETING 

manifest  in  the  producer  and  consumer  markets,  even  though 
they  may  be  first  sensed  in  the  wholesale  market. 

When  middlemen  know  what  the  retail  price  tendency  is 
they  alter  their  offers  to  purchase  to  suit — unless  higher 
prices  are  anticipated — so  that  the  burden  of  low  prices  will 
fall  on  the  producer  who  still  holds  his  goods.  Merchants 
who  have  bought  at  a  higher  price  cease  buying,  and  the 
retail  supply  may  thus  be  temporarily  reduced.  When  mer- 
chants need  to  renew  their  stocks,  they  will  not  pay  more  than 
the  price  they  expect  to  receive,  less  the  margin  they  want. 
But  the  producer  (or  merchant  he  has  sold  to)  has  the  product 
and,  in  the  end,  must  sell.  Unless  he  can  held  it  over  to  a 
later  time  when  supply  is  less  or  demand  greater  he  is  the  one 
who  loses  most  heavily.  Likewise,  when  prices  rise,  those  who 
hold  goods  tend  to  make  the  largest  gains.  The  merchants 
continue  taking  their  normal  margins,  and  functional  middle- 
men their  normal  commissions,  unless  prices  rise  very  rapidly 
or  they  buy  large  stocks  as  a  speculation. 

Ill 

Price  Fluctuations. — Fluctuations  in  market  prices  vary  as 
between  different  classes  of  markets,  and  different  products. 
They  occur  with  great  frequency  in  the  wholesale  market 
and  with  far  less  frequency  in  the  retail  market.  They  are 
frequent  but  small  in  markets  where  future  trading  enables 
speculators  and  traders  to  discount  future  market  trends. 
They  are  usually  infrequent  but  large  where  no  such  future 
trading  prevails.  Furthermore,  they  may  be  controlled  and 
stabilized  by  monopoly,  combination,  and  association.  Finally, 
fluctuations  may  respond  but  slowly  to  market  changes,  even 
under  truly  competitive  conditions,  because  of  the  use  of 
customary  or  convenient  sums  in  naming  wholesale  and  retail 
prices,  because  of  the  inconvenience  of  constant  changes  in 
price,  and  because  prices  are  sometimes  "maintained"  by 
manufacturers  of  branded  and  advertised  goods. 


MARKET  PRICE  435 

Prices  in  Different  Markets. — The  previous  discussion  has 
shown  the  limits  between  which  market  prices  tend  to  fluc- 
tuate: what  consumers  will  pay  is  an  obvious  upper  limit 
to  prices  and  the  costs  of  production  and  marketing  set  a 
lower  limit.  It  has  also  been  shown  that  almost  never  is 
either  of  these  a  definable  limit.  Cost  is  not  only  a  lower 
limit;  it  tends  also,  in  a  competitive  market,  to  be  an  upper 
limit,  which  may  be  far  below  the  limit  determined  by  con- 
sumer desire.  Over  a  period  of  time,  therefore,  market 
price  tends  constantly  to  fluctuate  about  costs — sometimes 
above  and  sometimes  below.20 

But  there  are  various  market  prices  prevailing  for  a  given 
commodity,  all  of  which,  however,  bear  a  close  relationship 
to  one  another.  For  farm  products  there  are  the  prices  at 
which  the  grower  sells  the  country  shipper,  the  price  at  which 
the  country  shipper  sells  the  wholesale  receiver,  and  the 
price  at  which  he,  in  turn,  sells  to  the  factory.  For  consump- 
tion goods  there  are  the  prices  at  which  the  country  shipper 
or  wholesale  receiver  sells  to  the  jobber,  the  price  at  which 
wholesale  dealers  sell  to  retailers,  and  the  retailers' 
price  to  the  consumer.21  Furthermore,  there  are  many 
markets  of  each  class  usually  spread  over  a  wide  territory, 
and  almost  innumerable  transactions  are  carried  on  in  each. 
In  the  market  for  manufactured  goods  a  similar  situation 
prevails. 

Some  of  the  most  interesting  problems  of  market  price 
concern  the  interrelations  between  the^£_j^jJQiiSL.niarke_ts- and 
the  transactions  in  them.  At  one  extreme  is  the  prime  pro- 
ducer; at  the  other  is  the  final  consumer.  Between  these 
there  appears  the  distributing  machinery,  often  comprising 
several  classes  of  markets,  and  frequently  one  or  more  manu- 

20  See  F.  W.  Taussig,  "Is  Market  Price  Determinate?"  Quarterly  Jour- 
nal  of  Economics,  Vol.  XXXV,  No.  3  (May,  1921),  pp.  394-411. 

21  These  are  not  exactly  speaking  prices  for  the  "same  product,"  since 
there  is  commonly  a  division  of  the  product  into  classes  of  different 
size  and  quality  somewhere  after  it  leaves  the  farm. 


436  PRINCIPLES  OF  MARKETING 

facturing  processes.  It  has  been  shown  that  the  variations 
in  price  at  the  different  steps  in  the  distribution  of  commodi- 
ties tend  to  conform  to  the  costs  involved.  But  is  the  retail 
price  determined  by  adding  a  mark-up  to  the  wholesale  price; 
or  does  it  work  the  other  way,  and  is  the  wholesale  price  de- 
termined from  the  retail  price?  Is  the  price  which  the  whole- 
saler pays  determined  by  the  costs  of  production  of  prime 
producers  plus  the  costs  and  a  normal  profit  for  any  marketing 
activities  involved  in  getting  goods  into  the  wholesaler's  pos- 
session? Or  does  it  work  the  other  way,  so  that  the  pro- 
ducer's price  is  determined  from  the  wholesale  price?  And 
how  closely  do  prices  in  one  market  follow  prices  in  another 
of  the  same  or  different  class?  These  and  similar  questions 
arise  concerning  market  price.  Their  answers  have  been  sug- 
gested, but  they  call  for  further  discussion. 

Prices  in  Different  Markets. — Fluctuations  in  wholesale 
market  prices,  i.  e.,  prices  at  which  wholesale  dealers  buy  and 
sell,  are  usually  more  frequent  than  are  fluctuations  in  retail 
prices,  or  in  the  prices  at  growers'  markets,  or  even  in  the 
prices  at  which  manufacturers  sell  to  wholesalers.22  One  gen- 
eral cause  for  this  is  the  fact  that  market  news  reflecting 
actual  or  supposed  conditions  of  supply  and  demand  is  first 
known  in  the  wholesale  market.  Furthermore,  since  both  buy- 
ers and  sellers  are  skilled  and  are  operating  on  a  large  scale 
they  probably  receive  this  news  simultaneously.  The  price, 
consequently,  is  constantly  forced  to  the  point  which  market 
news,  as  interpreted  by  the  wholesale  dealers,  seems  to  war- 
rant. 

Retail  Prices. — Retail  prices,  i.  e.,  the  prices  the  consumer 
pays,  fluctuate  less  than  wholesale  prices.  There  are  several 

22  "In  the  entire  price  system,  the  wholesale  price  is  most  highly  or- 
ganized, most  sensitive  to  changes,  has  more  frequent  but  on  the  whole 
less  violent  fluctuations,  and  is  usually  the  controlling  price  for  both 
producer's  prices  and  retailer's  prices." — C.  S.  Duncan,  Marketing:  Its 
Problems  and  Methods,  p.  237. 


MARKET  PRICE  437 

reasons  for  this.23  (1)  The  consumer  does  not  follow  the 
market  closely  and  consequently  does  not  know  of  changes 
in  the  wholesale  market.  He  is  normally  willing  to  pay  the 
same  price  day  after  day,  and  is  not  often  at  all  insistent 
that  the  retailer  follow  more  closely  the  trends  of  the  whole- 
sale market.  (2)  The  dealer  buys  his  product  in  quantities 
some  time  ahead  of  his  normal  demand.  In  many  lines  it  is 
the  custom  to  "mark-up"  the  retail  price  at  a  certain  per  cent 
over  the  cost  price.  In  a  falling  market  the  retailer  does  not 
wish  to  lower  his  prices  so  long  as  he  is  selling  high  cost 
goods.24  In  a  rising  market  the  inconvenience  of  constantly 
changing  prices  or  the  desire  to  make  a  good  impression  on 
his  trade  may  keep  him  from  raising  his  prices  at  once.  Again, 
(3)  customary  prices  prevail  in  certain  lines,  and  variations 
are  made  only  in  even  money  or  from  one  customary  price 
to  another.  (4)  Convenience  commonly  dictates  that  retail 
price  shall  not  vary  with  every  fluctuation  in  wholesale  price. 
When  one  considers  the  large  number  of  products  handled  in 
the  retail  store  it  is  evident  that  the  proprietor  and  his  clerks 
cannot  keep  track  from  hour  to  hour  or  even  from  day  to  day 
of  changes  in  the  wholesale  market.  There  are  practical  diffi- 
culties, furthermore,  in  re-marking  prices.  Aside  from  losing 
time  in  altering  price  marks,  clerks  cannot  remember  prices 
if  they  are  changed  too  frequently,  and  confusion  results. 
This  is  an  important  consideration  with  concerns  in  which 
many  small  articles  are  sold  rapidly  at  a  small  price,  such 

28  Some  of  these  points  were  mentioned  in  the  discussion  of  how  retail 
prices  are  determined,  but  they  are  essential  to  the  present  discussion. 

24  This  has  been  cited  frequently  as  a  cause  for  the  failure  of  retail 
prices  to  reflect  the  reductions  in  wholesale  prices  which  have  taken 
place  since  the  spring  of  1920.  By  refusing  to  sell  at  the  low  price 
which  actual  (potential)  supply  would  warrant,  in  view  of  the  existing 
demand,  retailers  not  only  do  not  lower  their  prices  but  they  refuse 
to  buy  a  further  supply,  because  their  stocks  move  slowly  and  they  do 
not  need  it.  This  causes  a  temporary  shortage  in  the  actual  supply  in 
the  retail  market. 


438  PRINCIPLES  OF  MARKETING 

as  grocery,  drug,  hardware,  and  dry  goods  stores.  (5)  Nor- 
mally the  retail  margin  is  so  great  that  minor  fluctuft&ees-4n 
wholesale  prices' make  up  a  very  small  per  cent  of  the  retail 
price.  For  example,  many  wholesale  price  fluctuations  are  less 
than  one  cent  per  retail  unit  whereas  changes  in  retail  prices 
cannot  be  less  than  one  cent  per  sales  unit,  for  change  cannot 
be  made,  and  with  many  retail  lines  price  changes  are  cus- 
tomarily made  in  even  sums  of  from  five  cents  to  one  dollar. 
It  is  evident  that  in  these  lines  minor  wholesale  fluctuations 
cannot  be  conveniently  passed  on  to  the  consumer  but  must  be 
absorbed  by  the  retailer. 

Producers'  Prices  and  Wholesale  Market  Prices. — Fasioxv 
anolfarm  prices  follow  wholesale  prices  more  closely  than  do 
rices,  chiefly  because  of  the  larger  scale  on  whitm  the 
operations  are  carried  on,  and  because  of  the  purpose  behind 
purchase  and  sale.  It  has  already  been  shown  that  when 
purchases  are  made  in  small  amounts — as  at  retail — the  buy- 
ers are  seldom  skilled,  nor  have  they  time  to  purchase  with 
care.  But  in  the  farm  market,  as  in  the  wholesale  market, 
trading  is  in  larger  volume  and  more  care  can  be  used.  Fur- 
thermore, the  consumer's  surplus  has  an  import* 
retaiL-Piirchases^Bu^it  has  practically  none  on  transactions 
at  other  points  in  the  marketing  machinery.  A  consumer  is 
buying  to  consume — to  meet  essentiaT~n5eds,  and  to  procure 
comforts  and  pleasures.  He  cannot  measure  these  accurately 
in  terms  of  their  money  value,  but  if  he  could  he  would  find 
often  that  their  money  value  in  his  estimation  was  much 
greater  than  the  actual  price  he  pays.  He  does  not  therefore 
estimate  each  time  he  pays  seven  cents  for  a  loaf  of  bread, 
fifteen  cents  for  a  can  of  soup,  ten  cents  for  a  cigar,  or  two 
dollars  for  a  theatre  ticket  whether  he  will  get  just  that 
much  satisfaction  out  of  his  purchase.  This  is  one  important 
explanation  of  the  lack  of  frequent  fluctuations  in  the  retail 
markets.  But  this  is  not  the  case  with  the  other  buyers  in 
the  market.  There  is  a  definite  money  measure  for  the  busi- 
ness value  of  their  purchases.  Whether  they  be  manufacturers 


MARKET  PRICE  439 

or  merchants,  they  must  constantly  consider  whether  a  pur- 
chase at  a  given  price  can  be  resold  at  a  profit.  If  the 
consumer  pays  seventy-five  dollars  for  a  suit  of  clothes 
which  could  have  been  purchased  around  the  corner  at  sixty 
dollars  and  next  month  at  fifty-five,  he  will  suffer  no  direct 
misfortune.  But  the  jobber  or  retailer  who  pays  too  much  will 
feel  the  effect  in  a  definite,  tangible  way — profits  will  decline 
or  disappear.  In  the  wholesale  market  a  difference  of  a  cent 
on  each  dollar's  purchase  is  often  the  measure  between  profit 
or  loss. 

Producers'  prices,  nevertheless,  vary  less  often  than  do 
wholesale  prices.  This  is  the  situation  with  farm  (local  mar- 
ket) prices.  In  some  trades  prices  in  the  central  market  vary 
many  times  in  the  course  of  the  day.  The  factory  and  farm 
prices,  on  the  other  hand,  unless  there  are  extreme  fluctuations 
in  the  wholesale  prices  seldom  change  more  frequently  than 
once  a  day,  usually  much  less  often  in  the  case  of  factory 
prices.25  But  these  changes  are  usually  larger  than  the  whole- 
sale variations — as  in  even  cents.  In  many  farm  markets, 
furthermore,  competition  is  not  usually  keen  enough  to  force 
dealers  to  follow  the  wholesale  markets  closely. 

The  Importance  of  the  Wholesale  Price. — There  is,  never- 
theless, a  normal  relation  between  these  prices.  This  normal 
relation  between  the  wholesale  price  and  the  retail  price  on 
the  one  hand  and  the  farm  or  factory  price  on  the  other 
is  determined  by  costs.  That  is,  the  retail  price  is  nor- 
mally the  wholesale  price  plus  the  costs  of  marketing  of  the 
various  middlemen,  jobber  and  retailer  for  example,  and  their 
mark-up  for  profit.  In  this  way  prices  are  "set."  True,  as 
has  been  shown,  the  market  forces  really  work  back  from  the 
retail  price,  but  the  wholesale  trade  senses  the  changes  in  the 

25  When  manufacturers  sell  "direct"  to  retailer  or  consumer  their  prices 
are  often  uniform  for  a  considerable  period  of  time.  This  is  particularly 
true  of  manufacturers  of  advertised  and  identified  merchandise.  Even 
the  prices  at  which  they  sell  jobbers  tend  to  remain  unchanged  for  con- 
siderable periods  of  time. 


440  PRINCIPLES  OF  MARKETING 

retail  market  before  the  retail  trade  senses  them.  This  pre- 
dominant position  of  the  wholesale  price  is  not,  consequently, 
an  indication  that  wholesalers  can  "determine"  what  price 
they  will  pay  and  receive.  It  is  due  to  the  fact  that  imminent 
changes  which  will  have  a  widespread  effect  in  the  retail 
market,  or  in  the  country  market,  or  on  the  factory  prices 
of  manufactured  goods  are  commonly  sensed  in  the  whole- 
sale market  before  they  become  evident  to  producers  or  re- 
tailers. That  is,  the  market  news  of  the  wholesale  market  is 


The  price  offered  at  the  country  market  and  in  less  degree 
the  manufacturer's  price,  are  normally  the  wholesale  price 
less  the  cost  of  buying  and  selling  the  product  in  the  central 
market,  plus  other  costs  which  the  shipper  must  bear,  plus  his 
normal  mark-up  for  profit.  Both  the  cost  and  the  mark-up 
vary  greatly,  however,  as  between  various  points.  Transpor- 
tation costs  in  particular  vary,  so  that  the  subtraction  or  ad- 
dition of  that  cost  results  in  great  variations  in  prices  at  dif- 
ferent points,  in  relation  to  the  price  at  a  particular  wholesale 
market.  Variations  in  the  cost  of  doing  business  are  also 
great  as  between  efficient  dealers  and  those  who  are  less  ef- 
ficient. That  part  of  the  mark-up,  furthermore,  which  goes 
to  profit  varies  greatly.  Where  competition  between  dealers 
is  keen  it  is  small,  but  where  a  single  merchant  has  little 
competition  and  where  agreements  exist  between  merchants 
this  margin  is  higher. 

The  Limits  to  Market  Areas.  —  There  are  for  many  staple 
commodities  a  "world  market"  and  a  "world  price."  This 
price  is  determined  at  the  point  at  which  the  surplus  products 
of  various  producing  areas  come  into  contact.  When  there  is 
such  a  world  price,  determined  in  the  centers  of  manufacture 
and  consumption  to  which  the  surpluses  of  the  producing 
areas  are  sent,  prices  in  the  producing  areas  and  in  all  in- 
tervening markets  tend  to  conform  thereto.  The  degree  of 
conformity  is  greatest  in  those  staple  articles,  such  as  wheat 
and  cotton,  in  which  an  organized  future  market  discounts 


MARKET  PRICE  441 

in  advance  the  effect  which  conditions  influencing  demand  and 
supply  will  have,  and  tends  to  keep  prices  between  markets 
"in  line."  (  It  has  just  beeiLjhownJliat  prices  in  the  ^central 
TYI  ft rkets  reflect  conditions  of  supply  and  demand 
,  and  it  is  in  these  markets  that  the  world  price  is 
most  evident.  (Retail  prices  and  the  prices  at  which  manu- 
facturers buy  raw  materials,  as  well  as  their  prices  to  buyers, 
are  also  closely  related  to  the  central  market  wholesale  price, 
and  so,  where  it  exists,  to  the  world  price.  But  this  relation- 
ship, particularly  in  the  case  of  retail  prices,  conforms  less 
to  the  immediate  conditions  of  demand  and  supply  than  does 
the  wholesale  price.  There  is  such  a  "world  price"  for  wool, 
cotton,  textiles,  iron  and  steel,  important  grains,  and  tobacco.26 
In  fact,  for  all  widely  used  or  widely  produced  products  which 
are  consumed  in  some  areas  in  greater  quantities  than  they 
are  produced,  and  which  are  produced  in  some  areas  in  greater 
quantities  than  they  are  consumed,  there  tends  to  be  a  world 
price — in  the  absence  of  prohibitive  marketing  costs. 

The  best  examples  of  a  world  price  are  found  in  the  wheat 
and  raw  cotton  markets.  /The  world  price  for  wheat  centers 
about  the  Liverpool  priced)  For  Liverpool  is  the  important 
import  market  of  western  Europe,  and  western  Europe  is  the 
greatest  wheat  importing  center  in  the  world.  It  is  here  that 
the  surpluses  of  the  great  producing  countries,  Russia,  Argen- 
tina, the  United  States,  Canada,  India,  come  into  competi- 
tion.27 The  demand  of  western  Europe  draws  wheat  in  that 
direction,  and  the  price  in  the  producing  country  must  equal 
the  basic  price  which  prevails  there  in  order  to  keep  the  supply 
it  desires  at  home.  That  is,  the  Chicago  price  for  wheat  is 
normally  the  Liverpool  price  less  the  cost  of  marketing  wheat 
from  Chicago  to  Liverpool.  The  prices  iri  other  central  mar- 
kets in  America  follow  this  price  also,  or  more  likely  follow 
the  Chicago  price  and  so  follow  the  Liverpool  price  because 

26  Tariffs,  however,  impede  the  tendency  in  many  lines. 
"An  interesting  discussion  of  the  "world"  price   for  wheat  will  be 
found  in  L.  D.  H.  Weld,  Marketing  of  Farm  Products,  pp.  256-262. 


442  PRINCIPLES  OF  MARKETING 

the  Chicago  price  does.28 (The  price  in  local  markets  is  likely 
to  be  the  Chicago  or  other  central  market  price  less  the  cost 
of  marketing  from  those  local  points  to  the  central  market.) 

Factors  Which  Limit  Market  Areas. — Where  marketing 
expenses,  especially)  transportation  costs,  are  very  high,  the 
area  in  which  a  uniform  price  tends  to  prevail  is  thereby 
diminished.  And  there  are  other  important  factors  which 
limit  market  areas.  One  of  these  is  the  fact  that  many  com- 
modities are*Tbip:hrv  perishable.  And  although  improvements 
in  transportation  and  storage  methods  have  increased  the 
distances  over  which  perishables  can  be  carried,  and  the  time 
they  can  be  held  before  use,  there  remain  a  number  which  must 
seek  a  limited  market.  Many  fruits  and  vegetables  are  of 
this  class.  But  even  goods  which  are  not  perishable,  and 
which  are  of  sufficient  value  to  afford  transportation  costs, 
often  have  considerable  limitations  in  respect  to  the  size  of 
the  market  in  which  they  will  be  sold  at  relatively  uniform 
prices.  The  principal  of  these  limitations  have  to  do  with  the 
method  of  sale  which  is  necessary,  and  with  the  confidence 
buyers  and  sellers  have  in  their  knowledge  of  future  conditions 
of  demand  and  supply.29 

(JWhen  goods  must  be  inspected  before  a  sale  takes  place, 
markets  are  limited  because  buyers  cannot  usually  inspect 
the  whole  supply, -or  even  a  large  part  of  it.  This  is  a  limit- 
ing factor  for  practically  all  commodities  which  are  produced 
over  a  wide  area  and  which  are  sold  by  inspection.  There 
develop,  consequently,  many  small  local  markets  in  which 
local  supplies  are  bought  and  sold.30  Even  such  markets, 
however,  are  interrelated.  Some  buyers  and  sellers  are  usu- 
ally found  who  operate  in  more  than  one  market,  and 

28  This   relation  between  the   Winnipeg  and   Minneapolis  prices   for 
wheat  and  the  Liverpool  price  is  shown  in  the  U.  S.  Tariff  Commission, 
Tariff  Information  Series — No.  20,  Agricultural  Staples  and  the  Tariff 
(1920),  p.  62. 

29  See  Macklin,  Efficient  Marketing  for  Agriculture,  pp.  308-317. 

30  Most  retail  markets  are  of  this  kind,  but  so  are  the  wholesale  mar- 
kets for  many  commodities. 


MARKET  PRICE  443 

they  in  turn  come  into  competition  with  those  who  operate 
in  yet  other  markets;  and,  furthermore,  large  operators  may 
spread  their  activities  over  a  wide  area  by  employing  trusted 
agents  on  whose  judgment  they  are  willing  to  depend.     There 
may,  consequently,  come  to  be  a  rough  relation  between  all 
such  markets.    ftVhen  goods  can  be  sold  by  rinmplr  or  drnrrip 
tion  thrTjimititinn  tn  tlir   nnrl-nt   irri   trnHa  fn  Hisapppar 
for  buyers  can  then  sp^t  from  Q  wiHpr  fprrifnry 

When  buyers  and  sellers  have  a  sufficient  knowledge  of 
the  future  course  of  the  market  to  be  willing  to  hold  surplus 
supplies,  in  case  they  are  not  able  to  sell  at  once  at  a  price 
which  corresponds  fairly  with  what  they  anticipate  future 
prices  will  be,  prices  are  likely  to  be  closely  related  over  the 
whole  market  area.  If  there  is  an  over-supply  at  one  point 
at  a  given  time,  it  will  be  held  for  a  later  time  when  the  sup- 
ply will  be  less,  or — and  this  is  the  more  important  point — 
it  can  be  shipped  on  at  once,  or  later,  to  markets  which  promise 
better  in  the  future.  That  is,  there  is  a  well  organized  mar- 
ket, in  which  differences  in  time  and  place  utility  are  con- 
fidently discounted,  and  a  wide  market  develops. 

Is  Market  Price  Determinable  in  Advance? — It  is  prob- 
ably impossible  to  find  any  means  for  determining  accurately 
at  what  price  a  product  should  be  offered  for  sale.  This  is 
particularly  the  case  with  a  new  product,  or  with  a  new 
quality  of  an  old  product  sold  under  changed  conditions — for 
example,  style  goods  in  a  new  season.  It  may  be  that  any 
one  of  a  dozen  different  prices  will  sell  enough  of  the  product 
to  leave  to  the  vendor  a  satisfactory  margin  of  profit.  But  it 
is  seldom  possible  to  tell  in  advance  which  one 'of  these  will 
prove  to  be  the  most  profitable.  It  may  even  be  impossible 
to  know  whether  a  given  price  will  prove  to  be  at  all  satis- 
factory. It  has  been  shown  elsewhere  that  profits  depend 
on  the  volume  of  business  and  the  unit  profit  per  sale,  and 
that  different  prices  generally  develop  changes  in  each  of 
these.  But  the  extent  of  these  changes,  particularly  in  their 
effect  on  volume,  can  be  forecasted  with  hardly  any  degree 


444  PRINCIPLES  OF  MARKETING 

of  accuracy.  This  is  true,  primarily;  because  it  is  impossible 
to  determine  in  advance  what  volume  of  sales  will  result  from 
each  of  several  prices,  and  what  amount  of  sales  effort  will 
be  necessary  to  sell  at  satisfactory  volume  at  each  price.31  /In_ 
-ftt-bpr  w^k,  it-  is  impossible  to  forecast  the  mind  of_the  buyer 
gr>plirptt'e1yr  and  so  f.hp.  rpjirmnf  buyers  to  any  price__can 


be  HfitfirTninftHnTily  hy  trial  jThp,  buyer's  rrnndj  fnrt,herrnoreT 
-•is  changea^lepand  so  the  be«t  price  to-day  may  be  an  unsat- 
isfactory price  to-morrow.  Clothing  novelties,  for  example, 
may  sell  at  a  high  price  until  they  become  common.  Then 
stocks  may  have  to  be  cleared  out  at  a  great  reduction.  Many 
stores  do  not  restock  novelties  after  the  novelty  aspect  begins 
to  wear  off. 

Style  goods  in  particular  are  ordinarily  sold  at  different 
prices  in  different  times  of  the  "season."  Early  in  the  sea- 
son a  high  price  can  be  set.  The  sales  at  that  time  are  made 
to  those  who  must  have  the  product  and  to  those  who  desire 
to  "be  in  season"  and  to  follow  the  styles.  To  these  buyers, 
style  and  quality  are  the  important  elements.  Later  in  the 
season  prices  may  be  lowered  one,  two,  or  three  times.  When 
the  best  selections  have  been  taken  the  appeal  must  be  shifted 
in  part  to  a  price  basis.  Buyers  who  are  more  interestedin 
values  than  in  ultra-style  can  be  appeljleijx}  only  at  Jpwer 
^prices.  Finally,  the  very  lowest  season's  end  prices  appeal  to 
those  with  small  income  and  to  bargain  hunters.  A  price 
policy  of  this  kind  seems  to  be  more  successful  in  the  sale  of 

31  This  factor  of  the  cost  of  selling  individual  items  is  too  frequently 
ignored.  A  product  which  the  dealer  does  not  need  to  advertise  or  dis- 
play and  which  requires  a  minimum  of  demonstration  and  sales  effort 
on  the  part  of  the  salesman  can  be  handled  on  a  narrow  margin  with 
profit.  But  a  product  which  must  be  advertised  and  displayed  and 
which  requires  a  large  amount  of  time  on  the  part  of  the  sales  force 
must  be  handled  on  a  wider  margin  —  a  margin  which  will  cover  these 
additional  costs.  See  R.  E.  Heilman,  "What's  the  Remedy  for  Diminish- 
ing Profits?"  System,  Vol.  XXXIII  (1918),  pp.  182-185,  and  L.  D.  H. 
Weld,  "The  Right  Selling  Price,"  System,  Vol.  XXXIII  (1918),  pp. 
711-713. 


MARKET  PRICE  445 

style  goods  than  would  the  policy  of  hitting  on  an  average 
price  for  the  season.  Another  example  of  pricing  the  same 
goods  differently  in  order  to  appeal  to  different  classes  of 
buyers  is  found  in  the  not  uncommon  method  of  selling  differ- 
ent grades  or  classes  of  a  commodity  or  service  —  crackers  and 
cookies  packaged  and  in  bulk;  first,  second,  and  third  class 
passage  on  boats. 

Prices  Constantly  on  Tricl.  —  Any  price  is  constantly  on 
trial.  If  it  results  in  a  very  large  demand  the  seller  may 
increase  the  price  and  in  this  way  increase  the  net  profit  per 
unit  sale.  This,  of  course,  can  be  done  so  long  as  the  supply 
offered  on  the  market  by  competitors  is  not  increased  to  such 
an  extent  that  competition  leads  them  to  cut  prices;  and  so 
long  as  there  is  a  sufficient  number  of  purchasers  willing  to 
pay  the  higher  price. 

Increasing  Demand  at  the  Same  Price.  —  If  demand  is 
slow,  one  thing  which  will  usually  enliven  it  is  to  lower  prices, 
although  that  result  by  no  means  always  follows  reduced 
prices.  There  is  another  way  of  increasing  demand  which 
is  often  more  effective.  That  is  to  try  to  influence  buy- 
ers so  that  they  will  buy  in  larger  quantities  at  the  prevail- 
ing price.  It  is  probably  true  that  many  products  now  sold  in 
large  quantities  and  at  good  prices  could  scarcely  have  been 
sold  at  all  when  they  were  first  marketed  without  these  efforts 
to  influence  prospective  purchasers.  This  truth  is  well  illus- 
trated  by  the  history  of  such'  specialties  as  typewriters  and 
adding  machines.  If  a  particular  product  does  not  "move," 
it  may  be  played  up,  consequently,  in  the  advertising,  featured 
in  the  show  case,  or  displayed  in  the  window,  or  the  efforts 
of  the  sales  force  may  be  centered  on  it.  It  is  stated,  for  ex- 
ample, that  a  brvpns  Ip^the  retail  salesman  of  fifty  centsr  a 

two  ^I 


much  more  rapidly  than  a  cut  of  five  to  ten  dollars  in  the 
selling  price.32 

32  This  has  obvious  ill  effects.    For  example,  salesmen  are  tempted 
to  show  only  the  goods  offering  the  highest  bonus. 


446  PRINCIPLES  OF  MARKETING 

Increased  Demand  through  Lower  Prices. — But  if  it  is 
found  that  increased  sales  effort  will  not  develop  an  increased 
demand  at  reasonable  cost  the  next  step  must  be  to  lower  the 
price.33  This  may  be  done  with  no  intention  of  calling  any 
special  attention  to  the  fact  that  the  price  has  been  lowered. 
In  such  a  case  it  is  simply  expected  that  a  larger  volume  of 
sales  will  eventually  result  from  the  lower  price.  In  other 
instances  business  men  have  large  stocks  of  goods  on  hand 
which  they  desire  to  turn  into  cash  as  soon  as  possible.  When 
this  is  the  case  the  lowering  of  the  price  is  a  temporary  ex- 
pedient, the  purpose  of  which  is  to  reduce  the  large  stock 
within  a  short  time.  Many  retail  "sales"  are  of  this  type,  to 
speed  the  sale  of  slow  moving  goods,  or  seasonal  stock  left  over 
at  the  end  of  a  season.34  Low  prices  are  also  used  to  make  a 
"leader"  of  a  product,  either  to  give  the  impression  that  all 
prices  in  the  houses  are  low,  or  to  attract  buyers  in  the  hope 
that  other  sales  will  result.35  Another  example  of  lowering 
price  to  increase  volume  of  sales  is  the  case  of  the  department 
store  which  sends  slow  moving  products  to  the  basement, 
where  they  can  be  sold  at  lower  prices  without  jeopardizing 
the  sale  of  similar  products  on  the  upper  floors. 

33  The  quality  of  the  article  or  service  may  be  improved.    But  so  far 
as  pricing  is  concerned  a  really  different  product  is  thereby  placed  on 
the  market. 

34  Nevertheless  retail  "sales"  are  not  so  commonly  of  this  type  now 
as  formerly.    It  is  particularly  true  of  large  city  stores  that  their  sales 
are  planned  months  in  advance  and  goods  are  ordered  for  the  express 
purpose   of  selling   during   the  "sale."     The   "annual   sales"   of   white 
goods,  furs,  furniture,  etc.,  which  are  featured  by  department  stores  are 
mainly  of  this  type. 

35  The  relation  of  this  policy  to  the  problem  of  resale  price-main- 
tenance will  be  discussed  in  the  next  chapter. 


CHAPTER  XXII 

PRICE-MAINTENANCE  AND  UNFAIR  COMPETITION 

I.    PRICE-MAINTENANCE 

Some  of  the  most  important  market  problems  center  about 
the  practice  of  price-cutting  and  the  means  used  to  eliminate 
it.  The  natural  result  of  competition  is  to  force  prices  down 
to  a  level  just  sufficient  to  induce  producers  and  distributors 
to  continue  bringing  the  required  volume  to  the  market.  But 
often  the  price  goes  below  this  point,  and  under  modern  con- 
ditions of  production  with  heavy  investments  in  plant,  equip- 
ment, technical  skill,  and  in  the  development  of  good  will,  it  is 
not  always  easy  for  producers  to  leave  one  field  of  activity 
to  enter  another.  There  may  be,  consequently,  long  periods 
of  time  during  which  a  given  manufacturer  or  even  whole 
groups  of  manufacturers  continue  producing  at  little  or  no 
profit  and  perhaps  at  a  loss,  in  order  to  avoid  the  greater 
loss  which  would  result  from  closing  down.1  And  even  though 
prices  do  not  fall  to  this  extreme,  sellers  look  askance,  never- 
theless, at  competition  which  is  manifested  by  the  reduction 
of  prices. 

Some  Remedies  for  Price-Cutting.2 — Very  naturally,  pro- 
ducers have  done  all  they  could  to  reduce  the  danger  from 

1  And  business  men  are  commonly  optimistic.    They  are  usually  ex- 
pecting "things  to  get  better,"  or  the  "turn"  to  come,  in  the  very  near 
future. 

2  There  are  many  who  do  not  agree  that  price-cutting  is  an  evil.    And 
surely  without  price-cutting  it  is  hard  to  see  how  buyers  are  to  benefit 
from   the    competition    of    sellers.    But    sellers    commonly    fear    price- 
cutting  and  so  long  as  they  do  they  will  endeavor  to  avoid  what  they 
conceive  to  be  its  evil  effects.    It  is  this  fact  which  is  discussed  in  this 
chapter,  not  whether  price-cutting  really  is  an  evil,  or  a  good  thing. 

447 


448 


PRINCIPLES  OF  MARKETING 


extreme  fluctuations  in  price,  and  particularly  that  from  fall- 
ing prices.  But  whether  times  are  "normal"  or  bad,  price- 
cutting  tends  to  be  present,3  and  its  effects  must  be  offset  by 
competitors  in  some  way.  The  most  obvious  method  is  to 

.reducjL-prices.   But  this  may  lead 

to  further  cuts,  and  then  more  cuts.  Sellers,  consequently,  pre- 
fer to  use  other  means  to  avoid  the  difficulties  of  competition 
on  a  price  basis,  and  they  have  evolved_  vj 
rnnjnterflMittg  fhp  price-cutting  ol  .  — „ 

A  temporary  expedient  has  sometimes  been^jx)  jower  the 
quality  of  the  product,  so  that  it  could  be  sold  at  a  lower 
jmce^jtiJUi--^ront.^[<In  other  cases  improved  methods  h%ve 
enaGled  a  manufacturer  or  Dealer  to  sell  at  the  reduced  price 
and  yet  make  a  profit,  oJjOby  improving  the  quality  of  the 
merchandise  to  continue  s^Hinff  n.t.  «  Jiig^hei*  ndre.  Another 

price-cutting  is  the  now  familiarjl \rust 
Manufacturers  have  sometimes  combined  TO  an  endeavor  to 
control  the  market  and  thus  to  maintain  prices  at  a  higher 
level.4  Again,  sellers  have  in  recent  years  been  forming 
"open  price  associations,"  through  which  they  have  endeavored 
directly  and  indirectly  to  influence  prices.5 

Emergence  of  the  Price-Maintenance  Problem. — In  yet 
other  cases  individual  manufacturers  have  identified  their 
product,  and  through  publicity — mainly  consumer  advertising 
— they  have  endeavored  to  build  up  such  a  demand  that  they 
can,  within  limits,  refuso  to  rcehre^-te' prices  at  which  they 
sell  to  the  low  level  to  which  compej^tiori  might  otherwise 
force  them.6  But  it  is  just  at  this  point  that  manufacturers 
meet  a  new  difficulty,  and  an  important  problem  in  public 
policy  has  emerged.  Retail  dealers  soon  saw  in  these  well- 
known,  branded  articles  an  opportunity  to  make  a  strong 

3  There  are  many  ways  in  which  prices  are  "cut."    See  pp.  467-470. 

4  See,  for  example,  L.  H.  Haney,  Business  Organization  and  Combina- 
tion (1914),  Chaps.  IX-XVI. 

6  See  pp.  389-390. 
6  See  pp.  419-420. 


PRICE-MAINTENANCE  449 

appeal  to  consumers  on  a  price  basis.  By  selling  such  articles 
at  a  lower  price  than  was  customary,  they  could  themselves 
realize  on  the  good  will  attaching  to  the  manufacturer's  brand. 
This  has  been  done  in  varying  degrees.  Some  stores  have  used 
a  few  articles  of  this  kind  as  "leaders,"  either  to  give  the  im- 
pression that  all  their  prices  were  low,  or  simply  as  a  drawing 
card  to  induce  people  to  come  to  the  store.  Other  stores 
claim  to  sell  all  goods  at  cut  prices.7  Again,  all  prices  may  be 
cut  during  "sales"  at  certain  periods  of  the  year.  Seasonal 
sales  for  the  purpose  of  selling  out  season-end  stocks  are  not 
ordinarily  of  importance  in  the  consideration  of  this  particular 
problem.  This  depends,  however,  on  whether  the  sale  is  really 
to  sell  out  stock  left  on  hand  at  the  end  of  a  season,  or  whether 
it  is  a  regular,  planned  sales  device.8 

Although  the  reduction  of  the  price  at  which  the  article  is 
sold  may  greatly  increase  the  sales  in  the  price-cutting  store, 
competing  stores  raise  frequent  objection,  and  in  the  end  the 
manufacturer  may  suffer.  Other  dealers,  it  is  contended, 
either  will  not,  or  cannot,  or  do  not  wish,  to  reduce  their 
prices  for  the  product.  Yet  with  one  store  offering  a  well- 
known  article  at  reduced  prices,  the  customers  of  other  stores 
may  be  disgruntled  and  there  may  even  be  a  demand  from 
them  for  the  lower  price.  Since  the  product  is  identified  and 
well-known,  consumers  buying  in  one  store  at  the  usual  price, 
on  learning  that  a  rival  store  is  selling  it  at  a  lower  price, 

7  A  representative  of  the  R.  H.  Macy  Co.  of  New  York  is  quoted  as 
saying:  "It  is  a  fact  that  we  sell  here  on  a  cash  basis  strictly.  .  .  .  This 
means  that  we  have  no  charge  accounts,  and  that  we  are  unable  to  offer 
to  the  public  those  facilities  which  go  hand-in-hand  with  the  credit 
privilege.    Without  these,  we  must  offer  some  substitute  inducement  to 
bring  the  public  to  us.  ...  Years  ago  we  decided  that  it  should  be 
price  inducements. 

"It  is  our  business  working-principle  to  sell  everything  lower  than  it 
can  be  bought  for  elsewhere  in  any  other  competing  retail  establish- 
ment."—Praters'  Ink,  Aug.  4,  1910,  p.  8.  Qwrted  *ft  P.  T. 
Advertising  as  a  Business  Force,  p.  406. 

8  See  p.  446,  note  34. 


450  PRINCIPLES  OF  MARKETING 

may  feel  dissatisfied  with  the  store  in  which  they  paid  the 
higher,  but  "regular,"  price  and  perhaps  refuse  to  deal  further 
with  it;  or  at  best  they  will  be  likely  to  go  to  the  other  store 
to  make  further  purchases  of  that  particular  article.  In  the 
end,  -it  is  claimed,  the  dealer  who  does  not  wish  to  lower  the 
price  will  refuse  to  handle  that  product  again,  or  at  least  will 
not  be  enthusiastic  in  pushing  it.  If  the  old  price  is  main- 
tained, he  fears  the  loss  of  trade;  if  the  lower  price  of  the 
price-cutting  dealer  is  adopted,  he  will  make  little  or  no  profit, 
or  may  even  sell  at  a  loss. 

In  view  of  these  facts  it  is  further  contended  that  the  dealer 
feels  aggrieved  and  the  manufacturer  loses  trade;  for  the  busi- 
ness of  the  price-cutting  merchant  is  not  likely  to  equal  that 
of  the  combined  sales  of  his  competitors.9  Furthermore,  after 
the  public  enthusiasm  over  the  cut-price  has  worn  off,  and  the 
injury  has  been  wrought,  it  is  asserted  that  the  price-cutter 
himself  is  likely  not  to  attempt  to  push  sales  of  that  particular 
article.  In  fact,  it  is  contended  that  h6  may  use  this  as  a 
device  to  draw  consumers  to  his  store,  and  later  gradually 
substitute  an  inferior  article  of  his  own. 

With  one  merchant  cutting  prices  others  are  likely  to  de- 
mand a  lower  price  from  the  manufacturer  or  from  their 
jobber  so  that  they  can  meet  the  competition.  The  jobber 
himself  may  also  try  to  exact  a  lower  price  from  the  manu- 
facturer. In  fact  when  dealers  find  that  a  competitor  is  sell- 
ing at  a  low  price  their  first  reaction  is  that  the  price-cutter 
has  received  a  lower  price  from  the  jobber  than  they  have. 
This  may  lead  to  ill-feeling,  as  well  as  to  a  demand  for  lower 
prices.  So  it  is  held  that  the  jobbing  trade  may  likewise 
suffer,  and  thus,  as  a  result,  the  manufacturer's  whole  distri- 

9  But  the  advertising  manager  of  a  "widely-known  toilet  specialty" 
quoted  in  Printers'  Ink,  Vol.  72  (Aug.  25,  1910),  p.  9,  says,  "In  the  cut. 
price  town  the  rank  and  file  [of  dealers]  are  'unfriendly' — all  advocating 
and  advising  'price  protection' — but  in  those  towns  the  sales  of  the  few 
big  dealers  selling  our  product  on  a  comparatively  small  margin  are  so 
large  and  so  satisfactory  as  to  make  us  almost  willing  to  forget  that 
the  small  dealers  are  there  at  all." 


PRICE-MAINTENANCE  451 

butive  process  may  suffer.  Believing  this  to  be  true,  the 
manufacturer  fears  the  disorganization  of  his  market,  built  up 
often  after  a  long  period  of  strenuous  sales  effort.  He  fears 
that  it  will  be  irretrievably  injured  from  the  price-cutting  ac' 
tivities  of  a  relatively  small  number  of  merchants,  and  other 
merchants  importune  him  to  "protect"  them.  ^To  meet  this 
situation  some  manufacturers  endeavor  to  fix  the  price  at 
which  buyers — jobbers  and  retailers — shall  sell  the  product — 
Price-Maintenance:  Defined;  the  Problem  Stated. — Price- 
maintenancejms  been  defined  as  "the  marketing  policy  which 

Consists   Of  theJmPOsition   bv   |bp   "rmrmfQH-nrPr   r»f  rQctrir>finr>g 

uj30ja^the^Q£ke  at  which  an  article  identified  by  tr_ade-mark, 
brand,  copyjught^or  pate^t_Daa^Jbe_j^saldJaju4U4Uirchaser  or 
sub-pwrekaser."  10  In  this  definition  can  be  seen  the  origin 
of  most  of  the  complications  which  arise  in  determining  the 
legal,  as  distinct  from  the  economic,  status  of  the  policy. 
Goods  identified  by  trade-mark,  copyright,  or  patent  and  on 
which  prices  are  maintained,  are  sold  subject  not  only  to  the 
common  law  but  to  the  statute  laws  applying  to  each.  The 
problem  has  not  been  settled,  but  the  genej^l£ndency_on  the 
part  of  the  courts  seems  to  be  to  refusethe  right  of  prjce- 
maihtenance  wnen  the  goods  are  sold  outright,  at. least  under 
plans  thus  far  attempted.  Most  of  the  cases,  however,  have 
not  considered  price-maintenance  on  its  economic  merits  but 
rather  in  connection  with  .the  rights  conferred  by  statutes 
under  the  copyright,  patent,  or  trade-mark  laws. 

Legal  Status. — Prices  maintained  by  combinations  of  man- 
ufacturers are  contrary  to  the  Sherman  Act.  And  an  agree- 
ment of  a  manufacturer  With  his 'jobbers  and  retailers  has  also 
been  declared  illegal  under  this  act.11  Agreements  involving 

10  From  H.  R.  Tosdal,  "Price  Maintenance,"  American  Economic  Re- 
view, Vol.  VIII  (March,  1918),  p.  29. 

u".  .  .  The  complainant  can  fare  no  better  with  its  plan  of  identical 
contracts  than  could  the  dealers  themselves  if  they  formed  a  combina- 
tion and  endeavored  to  establish  the  same  restrictions,  and  thus  to 
achieve  the  same  result,  by  agreement  with  each  other.  .  .  . 

"But  agreements  or  combinations  between  dealers,  having  for  their 


452  PRINCIPLES  OF  MARKETING 

a  contract  with  first  purchasers  by  which  they  agree  to  fix 
the  price  of  resale  by  sub-purchasers  at  a  point  fixed  by  the 
first  seller  have  also  been  held  illegal.12  It  would  appear, 
in  fact,  that  it  is  in  maintaining  resale  prices  of  sub-purchasers 
that  the  manufacturer's  greatest  difficulties  arise.  For,  even 
though  a  particular  agreement  by  the  first  purchaser  to  main- 
tain prices  cannot  be  enforced,  there  are  many  excuses  which 
the  manufacturer  can  find  for  refusing  to  sell,  or  for  selling  on 
unfavorable  price  conditions  to  the  price-cutter  to  whom  he 
sells  directly.13 

Jg^g^Jnggfj^mtv. — The  legal  status  of  resale  price-main- 
tenance is  slili  ufrSrtain.14     The  trend  of  recent  court  de- 
cisions has,  nevertheless,  made  three  things  fairly  clear.  pThe 
>Th^  sells  his  goods  outright  thereby  loses  con- 


x^ 

trol  ovej^felrenH /^Although  he  may  suggest  prices  to  dealers 
he  £annot  enforce  their  maintenance,  for  contracts  which  bind 

sole  purpose  the  destruction  of  competition  and  the  fixing  of  prices,  are 
injurious  to  the  public  interest  and  void."  Decision  of  the  Supreme 
Court  of  the  United  States  jn  the  case  of  the  Dr.  Miles  Medical  Com- 
pany v.  John  D.  Park  and  Sons  Company,  April  3,  1911.  220  U.  S.  408. 

"The  U.  S.  Supreme  Court  decided  this  in  the  case  of  the  Federal 
Trade  Commission  v.  the  Beech-Nut  Packing  Co.  (Jan.  3,  1922),  66 
U.  S.  (Lawyers'  Edition)  178. 

13  In  the  case  of  the  U.  S.  v.  Colgate  and  Co.,  250  U.  S.  300,  and  in 
the  case  of  the  Great  Atlantic  and  Pacific  Tea  Co.  v.  The  Cream  of 
Wheat  Co.,  227  F.  R.  46,  the  courts  affirmed  the  right  of  vendors  to 
select  their  bona  fide  customers,  under  the  common  law  and  section  2 
of  the  Clayton  Anti-Trust  Act.  See  also  S.  H.  Slichter,  "The  Cream 
of  Wheat  Case,"  Quarterly  Journal  oj  Economics,  Vol.  XXXI  (1916), 
pp.  392-412.  The  situation  is  not  clear  in  all  cases,  however.  See  the 
Federal  Trade  Commission  v.  Beech-Nut  Packing  Co.  (Jan.  3,  1922), 
66  U.  S.  (Lawyers'  Edition)  178. 

"For  detailed  discussions  of  the  legal  status,  and  for  citations  to 
important  cases,  see  Tosdal,  op.  cit.,  pp.  35  ff;  C.  T.  Murchison,  "Resale 
Price  Maintenance,"  Columbia  University,  Studies  in  History,  Eco- 
nomics and  Public  Law,  Vol.  LXXXII  (1919);  and  the  annual  reports 
of  the  Federal  Trade  Commission.  Printers'  Ink  follows  current  devel- 
opments and  one  of  the  most  recent  discussions  of  the  trend  of  court 
decisions  is  that  of  W.  H.  Spence,  "Recent  Cases  in  Price  Maintenance," 
Journal  of  Political  Economy,  Vol.  XXX  (April,  1922),  pp.  189-200. 


PRICE-MAINTENANCE  453 

the  dealers  to  such  prices  cannot  be  enforceo^y  A  manufac- 
turer may,  however,  refuse  to  sell  deaterp  who  p|n  nnf  ^gpryp 
his  prices.  This  may  be  sufficient  for  manufacturers  who  sell 
directly  to  retailers,  but  it  is  little  protection  to  the  great 
majority  who  sell  consumer  goods  to  jobbers.  Again,  a  manu- 
facturer who  consigns  goods  to  dealers  and  keeps  title  to  them, 
until  they  are  sold  to  consumers  may  maintain  prices  in  that 
way.  There  are  few,  however,  who  care  to  take  the  risk  in- 
volved in  such  a  policy,  or  who  have  the  financial  strength  to 
carry  it  out. 

Because  of  the  uncertain Jegal  situation  therff  fras  ypi^n. 
rather  insistent- dornn  mi  to  legalize  resale  contracts^  A  few 
such  statutes  have  been  passed  by  our  states,  and  bills  before 
Congress  have  received  considerable  attention.  The  question 
is  primarily  one  of  economic  policy  and  so  the  ultimate 
justification  for  the  practice,  and  hence,  for  the  passage  of 
such  an  act,  would  be  the  economic  benefit  that  would  result 
to  society.  With  this  in  mind,  let  us  review  some  of  the  more 
important  arguments  that  have  been  advanced  on  both  sides 
of  the  controversy.15 

The  problem  can  be  best  approached  by  a  general  discus- 
sion of  the  main  arguments  for  and  against  the  fixing  of  resale 
prices  by  the  manufacturer,  followed  by  a  discussion  from 
the  point  of  view  of  the  middleman  and  consumer. 

The  question  is,  fundamentally,  whether  the  manufacturer, 

15  The  main  features  of  the  Stevens  Bill  as  summarized  by  Murchison, 
op.  cit.,  p.  29,  are  as  follows: 

"I.  In  any  contract  for  the  sale  of  trade-marked  or  branded  goods 
the  manufacturer  may  require  the  observance  by  dealers  of  a  fixed 
price,  .  .  .  provided  that  his  brand  or  trade-mark  is  registered  with  the 
Federal  Trade  Commission  .  .  .  [and]  that  such  contract  permits  a 
limited  number  of  seasonal  or  disposal  sales — two  a  year — in  case  the 
manufacturer  does  not  choose  to  repurchase  the  goods  himself  on  thirty 
days'  notice. 

"II.  Emergency  circumstances  such  as  bankruptcies^  fires,  deteriora- 
tion of  goods,  etc.,  may  justify  a  divergence  from  price,  provided  the 
manufacturer  after  thirty  days'  notice  does  not  care  to  repurchase  the 
stock." 


PRINCIPLE  OF  MARKETING 
^-y^^ 

who  sells  an  article  identified  by  patent,  copyright,  or  trade- 
mark —  for  which  he  has  created  a  consumer  good  will  through 
his  own  sales  efforts  —  is  justified  in  dictating  the  prices  at 
which  that  article  shall  be  disposed  of  ajtnr  it  hnr  loft  his 

Wnrk^   anrjja  V>Ping  gnlrl  hy  inHpppnffcpt  jnbhars  and  retailers; 

or  is  each  of  these  dealers  entitled  to  decide  for  himself,  at 
what  price  he  will  sell  the  product? 

Arguments  Concerning  Price-Maintenance:  (i)  The  Man- 
ufacturer. —  The  advocates  of  price-maintenance  hold  that  it 
is  unfair.  jVfter  a  manufacturer  has  built  up  his  business 

Hvorfid 


fVirrmrrVi    nHvorfidnpr   nnH   nt.hpf  mpnrifl   ftf  dpmRJld^m^Mon,   for 

a  few  dealers  to  make  an  "unfair"  use  of  the  good  will  thus 
created  for  the  product,  to  the  detriment  of  competing  dealers 
and  eventually  to  that  of  the  manufacturer  himself.  It  is 
held  that  price-cutting  tends  to  cripj3leJJais--gee€Us^l,  by  caus- 
ing ill  will,  or  lack  of  interest,  on  the  part  of  otheF~3eaters. 
Sales  arsHhen  curtailed  or  else  prices  have  to  be  lowered  by 
the  manufacturer.  And,  of  less  importance,  it  is  argued  that 
will  is  undermined  because  the  value  of  the  product  is 
Hhe  consumer. 


The  first  point  is  the  important  consideration.  \  That  price- 
cutting  QDerpf<ag  tnwarrl  ftifl"rflicuiHnnr  a  market  can  be  ac- 
knowledged without  admitting  the  dire  results  which  are  said 
to  follow,  or  the  need  of  the  remedy  which  is  proposed.  The 
lack  of  supporting  data  concerning  the  evils  of  price-cutting 
of  this  sort  places  the  burden  of  proof  on  those  contending 
for  price-maintenance,  and  their  a  priori  reasoning  concern- 
ing the  evil  effects  of  price-cutting  avails  little  in  the  absence 
of  such  evidence.  Thus,  although  a  majority  report  of  a  com- 
mittee of  the  Chamber  of  Commerce  of  the  United  States  re- 
lated that  they  knew  of  "literally  hundreds"  of  cases  of  damage 
to  the  interests  of  manufacturers  and  merchants,  facts  to  sup- 
port their  contention  were  not  given.  The  minority  report 
declared  that  its  members  had  been  "unable  to  ascertain  one 
well  defined  case  of  the  failure  of  either  a  manufacturer,  job- 
ber, or  retailer  resulting  from  price  cutting  on  identified 


PRICE-MAINTENANCE  455 

goods." 16  Professor  Tosdal  states  that  an  examination  of 
the  statistics  of  failure  in  the  United  States  shows  that  they 
do  not  offer  much  support  to  the  contention  that  great  evil 
results  from  the  practice. 

Extreme  price-cutting  always  tends  to  lower  profits  whether 
the  goods  be  branded  or  unbranded,  but  it  might  seem  that 
the  advertised  branded  article  of  real  merit  would  have  a 
sufficient  hold  on  the  market  to  maintain  its  position,  even 
though  itTdoes  offer  an  excellent  mark  for  the  price-cutter. 
The  nature  of  this  argument  is  rather  interesting,  in  view 
of  the  fact  that  the  lowering  of  the  price  of  an  article  usually 
leads  to  an  increase  in  the  volume  of  sales.  That  the  consumer 
demand  for  some  goods  is  likely  to  decline  if  the  price  is  low- 
ered may  in  rare  instances  be  true.  That  is,  consumers  may 
question  its  value  at  the  low  price,  or  "high  class"  consumers 
may  no  longer  care  to  purchase  it.  But  the  far  more  general 
result  of  a  lowered  price  is  to  increase  the  volume  of  sales,  in 
which  case  the  demand  for  the  manufacturer's  product  will 
grow  rather  than  decline.  But  in  the  case  under  considera- 
tion the  situation  is  different.  For  when  the  price  is  low- 
ered by  a  single  dealer  in  a  market,  or  by  a  minority  of 
dealers,  it  is  held  that  a  different  result  follows.  True,  the 
price-cutters  may  sell  more  individually.  But  the  fall  of  the 
article  in  the  esteem  of  the  consumer,  or,  more  particularly 
the  disinclination  of  other  merchants  to  push  its  sale,  may 
more  than  offset  the  increased  sales  in  the  cut-price  stores. 
But  may  not  the  importance  of  these  points  be  greatly  over- 
emphasized? For  surely,  if  a  large  consumer  demand  has 
been  created  for  an  article  this  can  be  expected  to  offset  to 
a  large  degree  any  disinclination  of  the  dealer  to  handle  it. 
And  few  consumers  will  lose  their  desire  for  an  article  simply 
because  the  price  has  been  lowered.  It  is  also  true  that  for 
many  products  consumers  will  not  take  the  trouble  to  shop 

16  See  Report  of  the  Chamber  of  Commerce  of  the  United  States  on 
Maintenance  of  Resale  Prices,  Referendum  No.  13  (April  1,  1916),  pp. 
14,  21,  but  see  also  C.  T.  Murchison,  op.  tit.,  pp.  32  ff. 


456  PRINCIPLES  OF  MARKETING 

about.  Even  when  they  know  that  a  given  article  is  sold 
more  cheaply  at  another  store  they  will  not  usually,  unless 
the  difference  in  price  is  very  great,  go  muchjjut  of  their 
way  to  make  the  s&vmgJt^^^Z^^ 

The  Manufacturer'^Stetus. — If  the  manufacturernas 
created  a  powerful  consumer  demand  for  his  product  he  need 
not  fear  price-cutting  of  this  sort,  for  retailers  will  have  to 
handle  his  product  *or  lose  trade.  But,  even  though  this  is 
true,  he  may  lose  the  assistance  of  the  dealer  in  supplementing 
his  own  demand  creative  activity.  And  in  reality  very 
few  manufacturers  have  been  able  to  create  so  insistent 
a  demand  as  this.  The  majority  of  people  when  asking  for  a 
specified  article  are  willing  to  take  a  substitute,  either  be- 
cause of  the  trouble  of  looking  further,  or  because  of  the 
power  which  the  retailer  can  exercise  in  the  sale.  As  is  some- 
times said,  consumer  "acceptance"  has  been  created,  not  con- 
sumer "demand."  Again,  if  the  product  is  a  necessity  of 
which  the  manufacturer  has  a  virtual  monopoly  he  need  not 
fear,  for  the  product  will  be  demanded  of  the  retailer  just  as 
in  the  previous  case,  save  only  that  the  demand  may  be  more 
insistent,  since  no  substitutes  are  available. 

But  most  manufacturers  are  not  protected  in  these  ways. 
And  they  feel  that  they  cannot  ignore  the  problem.  Even 
those  who  are  protected  do  not  get  the  full  value  of  their  sales 
efforts  if  the  antagonism  of  the  dealers  who  handle  the  goods 
has  been  aroused  because  their  competitors  cut  the  price;  or 
even  if  the  dealers  simply  are  not  interested  in  pushing 
them.  Many  manufacturers,  when  they  fear  that  price-cutting 
will  injure  their  business,  contend  that  they  can  continue 
to  reap  the  benefits  of  their  market  campaign  only  by 
fixing  the  resale  price  of  the  goods.  They  feel  that  in  this 
way  alone  can  they  eliminate  the  price-cutter  as  a  disorganiz- 
ing influence. 

For  the  manufacturer  large  enough  to  establish  his  own 
channels  of  distribution  or  even  to  do  his  own  jobbing,  it  is 
relatively  easy  to  do  this.  l\In  the  first  case,  he  can  set  the 


ds.  iVln 


PRICE-MAINTENANCE  457 


nt,  whicji  Vm  hinflpplf  gpllg  tbp  ppnfilir^g-  —  ^n  the  second, 
nan  refllfifi-Jta_sell  those  retailers  who  will  not  pmirrifl,ir> 
p  pHpi]]ptpg^     For  although  the  legal  status  of  a 


manufacturer  who  refuses  to  sell  directly  to  a  price-cutter  is 
uncertain,  it  would  seem  that  in  general  he  will  have  little 
trouble.17  But  for  the  small  manufacturer,  or  the  manu- 
facturer of  a  single  line,  this  method  of  maintaining  prices 
is  likely  to  be  impossible.  He  cannot  afford  the  expense  in- 
volved in  having  a  sales  organization  of  his  own,  nor  is  he 
likely  to  be  willing  to  bear  all  the  risk  incident  to  such  a  plan 
of  distribution.  For  him,  a  gentlemen's  agreement  or  a  con- 
tract, if  legal  and  enforceable,  might  possibly  be  efficacious 
in  controlling  the  resale  price  among  the  jobbers,  particularly 
if  they  are  few  in  number.  But  for  the  retail  trade,  a  gen- 
tlemen's agreement  covering  a  wide  area  is  not  feasible. 
In  such  a  case,  apparently,  only  a  contract  enforceable  at  law, 
or  the  close  cooperation  of  jobbers  in  exacting  compliance 
from  retailers,  will  assure  the  maintenance  of  prigjj-.^^?  ' 
(2)  Price-Maintenance  and  the  Middleman^-Rmaamen- 
tally,  the  fate  of  a  policy  of  maintaining  prices  by  means  of  a 
contract  should  rest  upon  the  economic  aspects  of  the  question 
as  viewed  from  the  standpoint  of  the  final  consumer.  But 
the  effect  on  the  merchant,  as  well  as  on  the  manufacturer 
and  consumer,  is  also  important.  In  fact,  it  is  the  effect 
of  price-maintenance  on  manufacturers  and  merchants  and 
on  their  sales  policies  which  will  determine  the  effect  on 
the  consumer.  The  attitude  of  jobbers  consequently  war- 
rants a  word.18  In  so  far  as  they  handle  their  own  com- 
peting brands  they  tend  to  favor  price-maintenance,  but  since 
prices  may  be  easily  maintained  in  sales  to  the  first  purchaser 
there  is  little  need  for  a  statute  to  protect  their  own  branded 
goods.  Consequently,  the  jobber's  chief  interest  in  the  prob- 

17  Murchison,  op.  cit.,  pp.  27-28,  and  cases  cited  on  p.  452,  notes  12 
and  13. 

18  Jobbers  have  not  taken  a  prominent  part  in  the  discussions  of  resale 
price-maintenance.    In  so  far  as  their  associations  have  acted  it  has  been 
to  favor  the  policy.     But  many  individual  jobbers  are  opposed. 


458  PRINCIPLES  OF  MARKETING 

lem  is  determined  by  the  effect  which  price-cutting  and  prices 
maintained  by  manufacturers  have  upon  his  retail  trade. 
Thus,  if  the  jobber  feels  that_j3iieo  cutting  will  olimioate 
small  retailers  and  encourage  the  development  of  large^  re- 
tailers, who  buy  directly  trom  manula"cturers  or  who  force  him 
^fo  give  price  concessions,  ne  will  i'avor  a  policy  of  pn^e-m^^- 
This  would  do  away,  besides,  with  the"  demands  of 


some  of  his  customers  for  low  prices  to  meet  the  competition 
of  price-cutters.  Again,  those  jobbers  in  a  precarious  position 
in  the  trade  would  welcome  fixeo^pxifi^s,  since  such  prices 
would  probably  carry  a  sufficienTrnargin  for  them  to  operate 
on.  Since  the  success  of  the  jobber  is  dependent  on  the  con- 
tinuance of  smalLjctail  cotablialmients  his  interest  will  be 
primarily  determined  by  the  effect  of  the  policy  on  that  class 
of  stores. 

Retail  Monopoly  Argument.  —  In  the  consideration  of  the 
price-maintenance  problem  in  its  relation  to  retailing,  it  has 
been  contended  that  price-cutting  gives  to  the  large  retailer 
a  weapon  with  which  he  can  force  smaller  competitors  from 
the  field.  If  this  is  true,  fear  is  expressed  that  a  monopoly 
will  develop  on  the  part  of  a  few  great  establishments  like 
the  mail  order  houses,  department  stores,  and  chain  store  sys- 
tems. The  data  at  hand  do  not  seem,  however,  to  warrant 
so  general  a  conclusion.  Furthermore,  the  legalization  of 
price-maintenance,  unless  the  policy  were  widely  adopted, 
would  not  hinder  this  process.  For  cut  prices  on  other  articles, 
such  as  staple  but  unbranded  merchandise  or  on  merchandise 
branded  by  the  merchant,  even  now  used  often  as  "leaders," 
would  have  the  same  general  effect.  Qr  if  prices  werermain- 
on  all  articles  sold,  compe^ji^on  would  simply  be  forced 
from  tKcTTieid  jjf_jjricirlnto  that  of  servJ££^wh£ge  the  more 
efficient  and  more  powerf  ujmerch  f^j^J°ers^could--eontinue  to 
reap  ladvantages.  The  result,  then,  would  be  unsatisfactory 
to  the  consumer,  for  now  he  can  jih^ose-betw^enthe  different 
types  of  stores.  He  can  buy  of  the  stores  offering  low  prices 


PRICE-MAINTENANCE  459 

and  fewer  services,  such  as  the  familiar  cash-and-carry 
grocery  store,  or  he  can  buy  from  stores  charging  higher  prices 
but  offering  greater  services.  With  generally  maintained 
prices  he  would  have  to  pay  for  these  services  whether  he 
wished  or  no.  The  inefficient  stores  would  still  be  at  a  dis- 
advantage, and  small  but  efficient  stores  at  no  greater  ad- 
vantage in  competing  with  larger  competitors  than  they  are 
now.  ^One^of  the  essential  tests  of  modern  retail  efficiency  is 
the  rate  of  turnover,  and  an  important  method  of  stimulating 
turnover  is  through  lowered  prices.  It  is  evident,  then,  that  to 
the  extent  that  price-maintenance  would  keep  prices  higher 
than  they  would  otherwise  be,  either  retailing  would  by  so 
much  be  less  efficient  or  else  other  means  would  have  to  be 
developed  to  speed  up  the  turnover.  Finally,  the  fear  of 
monopoly  seems  absurd.  Even  though  all  small  stores  were 
eliminated,  presentT  indications  are  that  the  competition  be- 
tween great  department  stores,  chain  store  systems,  coopera- 
tive stores,  and  mail  order  houses  would  continue  unabated.19 
(3)  Price-Maintenance  and  the  Public. — On  the  assump- 
tion that  price-cutting  tends  seriously  to  injure  the  market  of 
the  manufacturer  of  advertised,  branded  products,  it  is  argued 
that  maintained  prices  are  not  in  the  interest  of  the  manu- 
facturer and  of  the  middlemen,  alone,  but  of  the  public  as 
well.  Two  reasons  are  advanced.  In  the  first  place,  it  is 
iVield  that  such  products  are  prnrjnppH  ^H  °^H  Ky  "i^rif"* 

methods,  which  assure  the  consumer  a  uniform  producT"bf 

-  *"- '  ,n, ' 

superior  quality  and  enable  him  to  make  his  purchases  with 
greater"  ease  and  certainty.20  In  the  second  place,  it  is  argued 
gjjat  price-maintenance  is  a  problem  which  arises  in  the  ftgae 
01  jidvert^sed,  branded  products:  that  these  products  are  com- 
monly superior  products;  and  that  the  sales  efforts  of  the 
manufacturer  lower  their  cost  through  enlarging  the  market 

19  For  a  discussion  of  the  present  strength  of  the  small  unit  store,  see 
pp.  187-190. 
30  This  has  already  been  discussed  in  Chap.  XIX. 


460 


PRINCIPLES  OF  MARKETING 


and  thus  lowering  the  expense  of  both  production  and  dis- 
tribution.21 But,  this  contention  runs,  cut  prices  tend^o 
.increase  the  manufacturing  problem  of  firmnnd  rrraitinn,  to 
costs  thereof,  and  may  even  tempt  him  to  lower  the 

quality    rvhhs   prpr^rt,   jn    nrdpr-~f7T~pnrnpptf>    on   a   price   basis 

rather  than  on  a  quality  basis.     Either  result  will  be  unfortu- 


nate. On  the  other  hand,  it  is  held  that  price-maintenance 
will  assure  to  the  public^the  bpnpfifc1  HnriwH  fpni-rrt.hp  sale  of 
branded  articles,  and  aTTof  the  saving&»derived  from  the  manu- 
facturer's superior  production  and  selling,  and  particularly 
from  his  advertising. 

This  is  all  a  question  of  fact.  Price-maintenance  has  not 
been  attempted  in  the  case  of  large  numbers  of  branded  prod- 
ucts, yet  they  continue  to  flourish  and  to  increase  in  number 
until  the  benefits  derived  therefrom  are  to  some  degree  counter- 
acted by  the  mere  increase  in  the  number  of  competing  brands. 
Hence  priflR-Tnaiptengnre  does  not  seem  necessary  for  keeping 
what  advantages  come  from  the  introduction  ojjpranded  arti- 
5$eSt  In  fact,  there  is  reason  to  believe  thatthese  benefits 
would  not  be  so  great  under  a  regime  of  price-maintenance  as 
they  are  now.  Tjhis  is  the  case  because  there  would  be  a  ten- 
dency to  increase  competing  brands,  and  hence  to  increase 
competing  advertising.  The  cost  of  this  might  well  run  up, 
without  any  firms  gaining  such  a  commanding  position  as 
actually  to  reduce  the  total  cost  of  demand  creation.  And  if  a 
few  firms  did  gain  such  an  advantage,  it  seems  more  than 
likely  that  the  opportunity  to  maintain  prices  would  facilitate 
price  understandings  which  would  cause  prices  to  rise.  In 
other  words,  it  would  tend  to  make  such  an  advantage  swell 
the  profits  of  the  fortunate  manufacturers  rather  than  to  reduce 
the  price  to  consumers.  In  the  absence  of  such  understandings 
competition  or  a  desire  to  enlarge  the  volume  of  business  would, 
however,  undoubtedly  lead  to  price  reductions  even  if  the  sup- 
posed benefits  from  price-maintenance  were  realized. 

On  the  other  hand,  the  contention  of  some  opponents  of 


21  See  pp.  24-27,  396-398,  and  pp.  522-529. 


PRICE-MAINTENANCE  461 

pricje-maintenance  that  competition  would  be  eliminated  jf 

ized  is  not  sound.  Not  even 
price  competition  is  avoided.  For  although  a  uniform  price 
of  resale  is  maintained  by  a  manufacturer,  that  price  must 
be  set  with  a  view  to  the  prices  of  competing  goods,  the 
strength  of  the  desire  of  consumers,  and  the  likelihood  of  sub- 
stitution. Dealer  competition  based  on  cutting  prices  is,  of 
course,  avoided ;  for  with  the  standard  price  set  by  the  manu- 
facturer the  competition  of  dealers  must  emphasize  the  quality 
of  the  product  and  the  service  offered  by  the  dealer — at  the 
fixed  standard  price.  The  chief  danger  to  competition  would 
be  that  competing  manufacturers  would  use  price-maintenance 
as  a  means  of  making  understandings  as  to  prices  more 
effective.  Such  understandings  exist  now,  and  price-main- 
tenance would  change  this  situation  only  if  it  facilitated  them. 
It  is  not  at  all  clear  that  this  would  occur,  although  the  price- 
fixing  activities  of  some  "open  price  associations"  might  be 
facilitated.  ^ 

The  changed  emphasis  in  dealer  competition,  mentioned  in 
the  last  paragraph,  is  the  cause  for  some  objection  to  the 
policy.  The  development  of  "service"  as  a  means  of  retail 
selling  is  considered  by  many  tolTave  gone  too  far.  It  is  gen- 
erally supposed  to  be  one  important  cause  for  the  high  cost  of 
retailing.  The  recent  development  of  "cash"  stores  and  of  cash- 
and-carry  stores  has  been  welcomed  as  a  means  of  affording 
lower  prices  to  the  large  number  of  consumers  who  are  willing 
to  forego  service  in  order  to  gain  lower  prices.  It  seems  un- 
reasonable that  dealers  whose  costs  are  low,  either  because  of 
reduced  service  or  of  greater  efficiency,  should  not  be  allowed 
the  use  of  the  price  appeal,  and  that  consumers  should  not 
receive  the  price  advantage  which  would  result.22 

In  the  long  run   it   appears  inconceivable  that  a   single, 

erent  types  of 
service  offered  by  retaiTstOrus  u«&t  in  the  end  be  recognized. 

22  There  is  no  question  of  the  existence  of  differences  in  costs.    See 
pp.  515-516. 


462  PRINCIPLES  OF  MARKETING 

Even  this  would  not  give  full  play  to  differences  in  the 
efficiency  of  stores  offering  similar  service.  Since  society 
depends  on  competition  to  force  out  the  inefficient  and  to  force 
prices  toward  lower  levels,  any  system  which  retards  that 
process  must  offer  compensating  advantages. 

What  Does  the  Dealer  Purchase? — It  is  held  that  the 
dealer  who  purchases  an  article  is  entitled  to  resell  it  at  any 
price  he  desires.23  On  the  other  hand,  those  who  favor  price- 
maintenance  argue  that  although  the  article  is  the  dealer's,  the 
ease  with  which  such  goods  are  sold  depends,  after  all,  on  the 
good_will  which  the  manufacturer  has  created  for  them  at  his 
own  expense.  But  the  opponents  of  price-maintenance  con- 
tend that  the  dealer  is  paying  for  this  goodwill  when  he 
buvs^the  article:  in  fact,  that  this  good  will  is  even  used^as  a 
sales  argument,  or  as  a  club  over  his  head,  in  selling  him. 
The  risk  of  the  destruction  of  that  good  will  the  manufacturer 
can  well  afford  to  take,  they  assert,  if  the  benefits  derived 
from  it  are  as  great  as  they  are  held  to  be.  On  this  point, 
however,  it  has  been  shown  that  few  facts  have  been  mar- 
shalled to  show  that  such  good  will  is  actually  destroyed. 

Price-Maintenance  and  Efficiency. — Whereas  the  advo- 
cates of  price-maintenance  sometimes  hold  that  price-cutting 
tends  to  elinimatethe  small  merchant,  and  toaster  mormuoly 
on  the  part  of  a  few  large  merchandisers,  their  opponents  con- 
tend that  price-maintenance  penalizes  efficient  merchant^  and 
s  disadvantageous  to  the  public  because  it  limits  competition 
on  a  price  basis.  TKTs  tendsfto  keep  the  p"u51Ic  fronTbenefi  ting 
from  superior  merchandising  ability,  because  the  efficient 
dealer  is  forced  to  compete  on  a  basis  of  service  alone.  And  it 
appears  that  perhaps  the  inefficient  merchants  would  be  as- 
sisted to  continue  in  business,  and  thus  the  superior  merchan- 
dising ability  of  the  more  efficient  would  result  in  greater 
profits  to  them  and  not  in  lowered  prices  to  the  consumer. 
Again,  it  is  argued  that  Jixed  prices  will  tend_to^b£ja4gb— 

23  The  same  reasoning  does  not  apply  when  goods  are  consigned  to  be 
sold  at  a  price  which  the  manufacturer  stipulates. 


PRICE-MAINTENANCE  463 

-prices,  as  the  avowed  purpose  is  to  maintain  prices  which  will 
make  possible  a  higher  profit  to  manufacturer,  jobber,  and 
retailer.  But  this  contention  does  not  appear  to  be  entirely 
warranted.  A  compilation  quoted  by  Cherington24  seems  to 
indicate  that  the  retail  margins  on  some  price-maintained 
articles  are  higher,  and  on  some  lower,  than  those  on  similar 
articles  on  which  prices  are  not  maintained.  After  all,  the 
maintained  price,  in  the  absence  of  monopoly,  must  be  set 
with  a  view  td  the  prices  of  competing  products,  and  can  be  no 
higher  than  the  market  will  warrant.  Maintained  prices  do 
not  necessarily  mean  "high  prices;  they  tend  rather  to  place  all 
dealers  on  the  same  price  basis,  high  or  low  as  the  case  may 
be.  In  the  absence  of  severe  competition,  however,  the  price 
HpHmihfpfjlY  tend  to  be  fixed  at  a  price  which  would 
all  dealers,  except  thejyery  poorest,  to  make  a 


This  would  be  true,  unless  themanulacturer  believed  that  the 
more  rapid  turnover  of  efficient  distributors,  selling  at  a  low 
price,  would  offset  the  loss  of  sales  by  the  less  efficient  dealers 
who  could  not  sell  at  that  price. 

The  Manufacturer's  Dilemma.  —  This  last  point  suggests 
the  dilemma  which  the  manufacturer  faces.  It  has  been 
shown  that  when  jjjrrr  Hrnlrrr  nut  prinrn  othrr  drnlrn  brrrmnr 
Dissatisfied.  To  meet  their  demands  the  manufacturer  must 
either  lower  his  prices  so  that  these  dealers  can  compete  with 
the  price-cutter,  or  he  must  fix  the  resale  price  and  enforce  its 
maintenance.  If  he  does  the  former  the  way  is  thereby  opened 
for  a  still  further  cut  by  the  price-cutter,  and  unless  an  en- 
larged volume  of  business  results  to  offset  the  new  price  he 
makes  to  his  distributors,  the  manufacturer  must  suffer  a 
reduction  in  profits.  But  if  he  does  the  latter,  i.e.,  fixes  resale 
prices,  he  may  lose  the  trade  of  the  price-cutting  merchant.  At 
best,  any  increase  in  the  volume  of  business  in  the  price-cutting 
stores  which  resulted  from  their  low  prices  will  be  cut  off. 
These  dealers,  however,  are  often  an  important  outlet  for  the 

**  In  his  Advertising  as  a  Business  Force,  pp.  386-390,  from  the  June  27, 
1912,  Printers'  Ink,  p.  3. 


f) 


464  PRINCIPLES  OF  MARKETING 

manufacturer's  goods,  so  that  he  desires  to  retain  their  good 
will.  This  is  particularly  true  of  lines  in  which  chain  stores  are 
important,  for  these  stores  frequently  operate  on  a  cut-price 
basis,  and  they  do  a  considerable  part  of  the  whole  business  in 
some  lines,  such  as  groceries  and  drugs.  Tha^manufacturer 
wants  t.frp...  business  of  the  large  pjire-c^it.tprsj  and  iTTEeir 
business  becomes  especially  desirable  his  attitude  toward 
fixing  resale  prices  may  undergo  a  change.  This  may,  if  the 
large  price-cutting  merchandisers  continue  to  grow  in  im- 
portance, force  the  manufacturer  to  distinguish  between-^rv- 
ice"  and  "non-seryiee"  stores,  and  between_Jarge  and  small 
stores,  in  aooptin^-ar-policy  with  regard  to  prices? 

Conclusion. — In  conclusion,  it  seems  that  the  evil  results 
from  cutting  the  prices  of  branded  goods  are  perhaps  not  so 
great  as  the  advocates  of  price-maintenance  beiieveT^^rFur- 
,thermOTe"pwTier<r  such  evils  do  exist  it  would  seem  that  an 
^(iministratiye  agency,  snc,b  «.«  t.hp  gederal  Trade  Commission , 
could  restrain  the  price-cutter.26  It  is  a  grave  question 
whether*~Ehe  public  would  benefit  sufficiently  from  legalized 
price-maintenance  to  warrant  such  interference  with  the  estab- 
lished regime  as  would  probably  result.27  But  in  this  con- 
nection it  should  be  said  that  even  with  price-maintenance 
legalized,  stable  prices  could  not  be  maintained  long  in  the 
sale  of  most  products.  Changes  in  production  and  distribu- 

26  Many  manufacturers  and  jobbers  give  lower  prices  to  large  stores — 
quantity  discounts  which  smaller  stores  cannot  obtain  because  the 
volume  of  business  does  not  warrant  it. 

26  Section  5  of  the  Federal  Trade  Commission  Law  declares  unfair 
methods  of  competition  illegal  and  allows  the  Commission  to  decide 
what  is  unfair.    The  Commission  is  now  opposed  to  price-maintenance, 
holding  it  to  be  an  unfair  method  of  competition  in  violation  of  Section 
5  of  the  Federal  Trade  Commission  Act.    In  a  number  of  cases  the  Com- 
mission has  issued  orders  to  cease  the  practice.    With  the  decision  in 
the  Beech-Nut  Packing  case  the  Commission's  stand  on  many  of  these 
cases  has  been  upheld  by  the  courts. 

27  On  the  other  hand  price-maintenance  was  not  thought  to  be  illegal 
until  the  case  of  Miles  v.  Park,  220  U.  S.  373,  was  decided  in  1911,  and 
the  decisions  in  other  cases  were  handed  down  about  that  time. 


PRICE-MAINTENANCE  465 

tion  constantly  lead  to  price  changes.  And  prices  would  be 
particularly  hard  to  maintain  in  a  time  of  falling  prices. 
Finally,  it  may  well  be  doubted  whether  those  who  maintained 
prices  would  really  benefit  in  the  end,  since  competition  would 
not  be  eliminated  but  would  turn  to  competition  in  service 
and  quality,  which  might  ultimately  bring  about  conditions 
as  bad. 

There  is,  nevertheless,  room  to  question  whether  a  manu- 
facturer should  not  be  allowed  this  privilege  if  he  desires  it. 
The  manufacturer  who  sells  "direct"  to  retailer  or  consumer 
can  legally  maintain  prices  if  he  wishes.  But  the  manufac- 
turer who  has  insufficient  capital  to  sell  directly,  or  who  be- 
lieves it  is  more  economical  to  use  jobbers,  finds  it  difficult  to 
dictate  selling  prices.  In  the  event,  then,  that  such  a  manu- 
facturer believes  price-maintenance  is  important  he  has  an 
incentive  to  market  through  his  own  organization.  He  may 
even  choose  to  do  so  despite  the  added  cost.  This  would  seem 
to  be  unfortunate  for  him  and  for  society.  But  if_!he_maiiiL- 
facturer  who  markets  directly  to  retailer  j?r  consumes,  can 
maintain  prices  there  is  good  reason  to  argue  that  his  smaller 
nrmnppfjtor,  and  manufacturers  in  other  lines  in  which  direct 
marketing  is  not  feasible,^sFould_  be  allowed  to  exercise  the 
samo  privilege. 

Perhaps  the  whole  controversy  has  assumed  unwarranted 
importance.  Doubt  has  already  been  expressed  as  to  its  im- 
portancsjLo-flaaniifacturers.  On  the  other  hand,  it  is  a  ques- 
tion as  to  wJiether  legalized  price-maintenance  would_  have 
jnuch  effect  on  the  consumer.  With  competing  products,  prke 
competition  would  simply  be  shifted  from  the  retailer  to  the 
manufacturer.  Since  the  manufacturer  would  have  to  feel 
the  pulse  of  the  market  to  maintain  his  sales,  the  consumer 
would  not  suffer.  If  the  industry  were  monopolized,  or  if  the 
maintained  prices  took  the  form  of  understood  prices,  as  be- 
tween competitors,  nothing  fundamentally  new  would  be  intro- 
duced. Legal  remedies  are  at  hand  to  deal  with  such  con- 
tingencies, and  if  price-maintenance  facilitated  such  under- 


466  PRINCIPLES  OF  MARKETING 

standings,  a  requirement — such  as  that  of  the  Stevens  Bill — 
that  prices  be  registered  with  the  Federal  Trade  Commission, 
would  be  sufficient  protection  from  this  new  danger. 

II.    UNFAIR  COMPETITION 

Introduction:  Competition  and  Economic  Effectiveness. 
—To  achieve  the  best  economic  results,  competition  must  be  so 
ordered  that  those  individuals,  firms,  and  corporations  which 
are  most  efficient  in  making  and  selling  will  survive  the  strug- 
gle with  their  less  efficient  competitors.  This  does  not  mean 
that  it  is  to  the  interest  of  society  that  the  largest,  the 
wealthiest,  or  the  most  unscrupulous  should  succeed,  but 
rather,  that  he  who*  produces  the  best  product  at  the  lowest 
cost,  or  who  can  market  the  products  of  others  most  effectively 
and  most  economically  should  succeed.  In  this  way  competi- 
tion tends  toward  the  survival  of  those  producers  and  middle- 
men who  can  best  serve  society,  and  through  themr  to^the 
development  and  perpetuation  of  the  best  technique.  Unfor- 
tunately, however,  the  profit  seeking  which  underlies  the  com- 
petitive system  often  leads  to  methods  of  competition  which, 
however  effective  they  may  be  from  individual  points  of  view, 
cannot  be  said  to  be  to  the  best  interest  of  society.  Such 
methods, — i.e.,  methods  which  tend  to  the  survival  of  those  who 
use  them,  but  which  do  not  tend__tg_p_rnmntft  mnrp  efficient  pro- 
dactloh  and  distl'ibuLion^arecoming  to  be  called  unfair 
methoHs  ol  compefitrns..  They  are  looked  upon  as  unfair  to 
competitors,  and  as  economically  and  socially  undesirable. 

Unfair  Methods  and  Big  Business. — The  unfair  methods 
of  competition  which  have  received  widest  publicity  have 
been  closely  associated  in  the  public  mind  with  the  methods 
of  big  business.  And  indeed,  they  are  frequently  methods 
which  can  be  used  effectively  only  by  firms,  or  combinations 
of  firms,  which  are  larger  and  more  powerful  than  their  com- 
petitors, though  not  necessarily  technically  superior  to  them. 
These  methods  are  various,  and  the  literature  of  the  relations 
of  big  business  with  the  courts  abounds  in  examples.  Some 


PRICE-MAINTENANCE  467 

of  the  more  important  of  these  unfair  methods  of  competition 
will  now  be  presented  in  order  to  give  a  general  picture  of 
the  practices  inVolved.  It  will  be  evident,  however,  that 
many  of  them  are  not  always  "unfair."  In  fact,  some  of 
them  are  commonly  looked  upon  as  legitimate  means  of  com- 
petition.28 

I.  Unfair  Price  Practices.29 — First  in  importance  are  cer- 
tain practices  which  center  largely  about  prices.  It  is  ex- 
pected that  competition  will  center  about  price,  and  conse- 

28  In  its  efforts  to  enforce  Section  5  of  the  Federal  Trade  Commission 
Act  "the  Commission  has  handled  some  3,000  cases,  has  issued  788 
formal  complaints,  and  issued  480  orders."  Most  of  these  cases  have 
been  brought  to  the  attention  of  the  Commission  by  business  men  them- 
selves "and  they  indicate  the  presence  of  a  strong  and  healthy  force  in 
American  business  life  tending  toward  the  suppression  of  obstructive 
elements  and  the  upbuilding  of  fair  and  moral  commercial  standards." 
Two  general  classes  of  cases  come  before  the  Commission:  "first,  those 
practices  where  a  difference  of  opinion  as  to  right  and  wrong  exists  in 
the  trade  itself.  Such  questions  are  highly  controversial.  They  include 
and  are  typified  in  the  question  of  resale-price  maintenance.  .  .  . 

"Second,  those  practices  where  a  difference  as  to  right  and  wrong 
does  not .  exist  in  the  trade  itself,  but  where  in  given  cases  there  is 
controversy  over  the  facts." — Annual  Report  of  the  Federal  Trade  Com- 
mission (1921),  pp.  5-7. 

A  list  of  the  "methods  of  competition  condemned"  will  be  found  in 
the  annual  report  for  1920,  pp.  56-57. 

"The  Federal  Trade  Commission  has  classified  the  methods  of  unfair 
competition  "violative  of  the  statute"  into  three  broad  classes: 
"(1)  Methods  involving  an  element  of  moral  turpitude  since  they  are 
characterized  by  fraud,  deception,   misrepresentation,  intimida- 
tion, or  some  similar  wrongful  element. 

"(2)  Methods  which  while  not  generally  involving  any  element  so 
clearly  violative  of  good  morals,  are,,  nevertheless  such  as  are 
unlawful  because  condemned  by  the  common  law. 

u(3)  Methods  not  involving  either  of  the  elements  in  the  foregoing 
classes  but  which  had  the  effect  of  directly  placing  restraint  upon 
the  freedom  of  particular  competitors  to  compete,  of  closing 
the  channels  of  distribution  by  contract  or  otherwise  to  com- 
petitors generally,  or  of  eliminating  competition  or  otherwise 
restraining  trade  to  the  detriment  of  competitors  and  the 
public."— Annual  Report,  1920,  p.  48. 


468  PRINCIPLES  OF  MARKETING 

quently  it  is  illuminating  to  see  in  what  ways  such  competi- 
tion may  become  unfair.30  (1)  First  of  all  is  the  plain  policy 
of  reducing  the  price  of  products  below  the  cost  of  production. 
Obviously,  if  a  price  were  reduced  below  a  competitor's  cost 
of  production  but  still  allowed  a  reasonable  profit  to  the  price- 
cutter,  that  would  be  the  very  result  which  it  is  hoped  to 
obtain  through  competition.  The  less  efficient  producer  would 
thereby  be  eliminated.  But  when*  the  price-cutter  lowers 
his  price  below  his  own  cost  of  production,  an  entirely  different 
situation  arises.  A  practice  of  that  kind  can  be  carried  to  a 
successful  conclusion  only  by  a  firm  which  is  financially 
more  powerful  than  its  competitors,  and  even  then  for  but  a 
short  time  or  in  part  of  its  market.  A  firm  financially  weaker 
than  its  competitors  would  be  playing  a  losing  game,  whereas 
in  the  case  of  firms  of  equal  financial  capacity  and  productive 
ability  the  policy  would  result  in  a  victory  for  neither.  But 
the  financially  powerful  organization  mav  be  less  efficient  than 
many  of  its  financially  weaker  competitors,  and  yet  through 
mere  "length  of  purse"  it  may  be  able  to  cut  prices  until  its 
competitors  are  ruined,31  or  are  willing  to  compromise  on  some 
basis  that  is  more  agreeable  to  the  stronger  party  than  it 
frould  be  to  carry  the  struggle  through.32 

Other  Price-Cutting  Methods. — But  price-cutting  may  not 
be  so  widespread.  (2)  A  large  organization  may  wish  to 
eliminate  a  competitor  in  a  certain  section  of  the  market.  By 
lowering  prices  there  and  keeping  them  up  elsewhere  it  will 
bring  about  the  desired  result  effectively  and  more  cheaply. 

30  The  fixing  of  resale  prices  is  considered  undesirable  by  the  Federal 
Trade  Commission,  but  that  practice  has  already  been  considered. 

81 F.  W.  Taussig,  Principles  oj  Economics,  Vol.  II  (rev.  ed.,  1915), 
p.  427. 

"Illustrations  are  not  used  in  the  present  discussion.  They  are  easy 
to  find,  and  those  interested  are  referred  to  the  Bureau  of  Corporations, 
Trust  Laws  and  Unfair  Competition  (1915),  and  its  reports  on  the  steel 
and  other  industries;  W.  H.  S.  Stevens,  Unjair  Competition  (1917); 
Annual  Reports  oj  the  Federal  Trade  Commission,  and  the  great 
volume  of  "trust"  literature  now  available. 


PRICE-MAINTENANCE  469 

(3)  Or  the  manufacturer  of  a  "line"  of  products  may  be  able 
to  undersell  the  competitor  who  produces  a  single  commodity 
in  that  line  by  reducing  prices  for  it  below  costs.  Although 
losing  money  on  the  one  line  he  can  still  sell  the  other  products 
at  the  usual  prices.  Sometimes  the  same  object  is  accom- 
plished more  indirectly,  and  (4)  supposedly  independent  com- 
panies controlled  by  the  price-cutter  offer  their  product  at  a 
low  price  while  the  product  of  the  parent  company  continues 
to  be  sold  at  the  regular  prices.  These  "bogus  independents" 
prove  to  be  effective  in  destroying  competition  while  at  the 
same  time  regular  prices  and  the  good  will  are  retained  for 
the  parent  company's  product.  (5)  In  still  other  cases  the 
company  may  put  out  a  single  product — a  "fighting  brand" — 
of  approximately  the  same  characteristics  as  the  competing 
product.  By  doing  this  it  hopes  to  gain  the  trade  of  those  han- 
dling the  competing  brand.  At  the  same  time,  it  continues 
to  sell  the  regular  lines  at  the  usual  prices. 

Some  other  methods  of  competition  found  in  the  trade 
activities  of  merchandisers,  as  well  as  in  those  of  manufac- 
turers, can  also  be  grouped  under  the  head  of  price-cutting 
methods,  although  they  affect  prices  more  indirectly.  Thus 
(6)  some  manufacturers  and  some  retailers  use  trading  stamps, 
coupons,  and  the  like,  so  that  when  a  certain  amount  of  busi- 
ness has  been  done  a  prize  of  some  sort  is  received.  It  is  ob- 
vious that  this  is  in  the  nature  of  an  indirect  discount  for 
quantity  purchases,  which  may  or  may  not  be  unfair  as  it 
results  or  does  not  result  in  unduly  lowering  prices.  It  has 
sometimes  been  used  as  a  means  of  local  price-cutting.  When 
used  by  manufacturers  a  scheme  of  this  kind  is  made  even 
more  effective  by  giving  the  discount  only  in  case  all  products 
of  a  given  line  are  bought  from  the  manufacturer.  (7)  Some- 
times large  quantity  discounts,  or  "inside  prices"  are  used  to 
undersell  competitors.33  These  nfay  be  granted  only  to  very 
large  buyers,  and  in  so  far  as  they  are  not  warranted  through 
the  savings  that  may  result  from  handling  large  orders,  they 

83  See  P.  H.  Nystrom,  The  Economics  of  Retailing  (1915),  Chap'.  XVI. 


470  PRINCIPLES  OF  MARKETING 

discriminate  against  competitors.  (8)  In  yet  other  cases  it  has 
been  urged  that  certain  manufacturers  or  dealers  give  exces- 
sive credit  or  discounts  for  cash  which  their  competitors  who 
can  produce  as  efficiently  cannot  give. 

II.  Closing  Channels  of  Distribution. — A  very  effective 
method  of  destroying  competition  is  to  close  the  channels  of 
trade  to  a  competitor's  product.  He  is  then  forced  to  sell 
his  product  directly  to  the  ultimate  consumer  through  his 
own  marketing  system,  or  else  go  out  of  business.  Or  if 
he  is  a  dealer,  he  must  produce  his  own  product.  Of  course 
this  method  is  seldom  so  effective  as  this  statement  makes  it 
appear  to  be  and  it  results  usually  only  in  hampering  the  com- 
peting firm  to  a  greater  or  less  degree.  Among  the  most  com- 
mon means  of  closing  the  channels  of  distribution  to  a  com- 
petitor are  thfi^fiyp.hisivfi^HftaJjng  contract  and  the  method 
known  as  ".full  line  forcing."  (1)  In  the  former  case  the 
manufacturer  induces  the  dealer  to  whom  he  sells  to  agree  to 
handle  no  competing  line.  If  he  is  able  to  get  the  best  dealers 
in  a  given  area  to  agree,  the  most  desirable  channels  of  distri- 
bution are  thereby  closed  to  competitors,  who  must  then  dis- 
tribute their  goods  themselves  or  use  inferior  middlemen.  (2) 
In  the  second  method  the  seller  controls  some  particularly 
desirable  product  which  the  dealer  feels  that  he  must  handle  to 
keep  his  trade.  But  the  seller  refuses  to  allow  him  to  merchan- 
dise it  unless  the  dealer  also  agrees  to  handle  other  products 
which  the  seller  has.  Combined  with  the  exclusive  dealing 
contract,  such  a  system  operated  by  a  powerful  firm  may  prove 
very  effective  in  hampering  the  trade  of  those  who  are  attempt- 
ing to  sell  competing  lines. 

(3)  There  is  a  general  feeling  of  hostility  on  the  part  of 
the  retailer  and  the  wholesaler  who  term  themselves  "regular" 
dealers  against  new  types  of  dealers,  and  against  those  who 
step  out  of  their  place  in  the  channel  of  distribution.  Thus, 
manufacturers  who  sell  over  the  heads  of  jobbers  or  directly 
to  consumers  are  not  looked  upon  with  favor,  and  likewise 
"direct"  purchase  by  consumers  and  dealers  is  opposed.  To 


PRICE-MAINTENANCE  471 

counteract  these  methods  of  trading,  strong  dealer  associa- 
tions, through  the  use  of  lists  of  "regular  dealers"  and  of 
"fair"  or  "black"  lists  of  dealers  and  manufacturers,  some- 
times attempt  either  to  have  manufacturers  sell  only  to  "regu- 
lar" dealers,  or  to  have  the  regular  dealers  buy  only  of  the 
manufacturers  or  jobbers  who  are  "fair" — in  the  sense  that 
they  do  not  overstep  the  bound  of  their  "regular"  business,  as 
those  bounds  are  set  by  the  "regular"  dealers.  These  efforts 
are  often  very  successful  in  the  accomplishment  of  the  dealers' 
purpose.  But  as  they  tend  to  maintain  the  status  quo,  they 
are  likely  to  stand  in  the  way  of  such  integrations  in  market- 
ing processes  as  might,  if  allowed  to  develop,  produce  a  true 
economy  in  marketing. 

III.  Dishonest  and  Questionable  Practices. — In  addition 
to  the  methods  which  have  been  discussed  other  practices  are 
engaged  in  which  are  obviously  dishonest.  These  practices  not 
only  hamper  competitors  in  their  market,  and  so  keep  them 
from  reaping  the  natural  benefits  of  such  productive  and  dis- 
tributive efficiency  as  they  may  possess,  but  most  of  them  can 
be  questioned  when  viewed  from  either  the  ethical  or  social 
point  of  view.  Among  such  practices  are  (1)  attempts  to 
induce  a  competitor's  customers  to  break  contracts  and  refuse 
to  make  purchases  or  sales  of  products  as  agreed; 34  (2)  espion- 
age upon  another's  business  through  bribery  of  his  employees 
or  of  the  employees  of  service  industries,  such  as  railroads  and 
express  companies  who  handle  his  product;  (3)  bribery  of  the 
buying  agents  of  a  competitor's  prospects;  (4)  misrepresenta- 
tion of  a  competitor's  goods  through  advertising,  salesmen,  or 
correspondence;  (5)  passing  off  one  manufacturer's  goods  as 
those  of  another,  by  wholesale  and  retail  dealers;  (6)  bringing 
unwarranted  suits  against  a  competitor  for  infringement  of 
patents  or  other  alleged  illegal  acts,  so  as  to  injure  the  com- 
petitor and  give  him  a  bad  name  in  the  trade;  (7)  copying  and 
selling  goods  based  on  the  patents  of  weaker  competitors  who 

"They  may  even  agree  to  protect  the  contract  breaker  financially  in 
case  of  a  law  suit. 


472  PRINCIPLES  OF  MARKETING 

cannot  afford  a  suit  at  law  to  protect  their  rights.  (8)  Less 
direct  is  the  use  of  coercion,  or  intimidation  of  a  competitor 
or  his  customers,  through  threats  to  use  some  of  the  methods 
already  discussed  in  case  they  continue  to  compete,  or  to 
purchase  of,  or  sell  to,  the  competitor,  as  the  case  may  be. 
(9)  Finally,  even  such  violent  methods  as  the  direct  inter- 
ference with  competitors  have  been  so  prominent  as  to  war- 
rant mention.  Breaking  a  competitor's  product  in  the  hands 
of  the  purchaser,  interference  with  delivery  through  bribing 
transportation  companies  to  delay  shipments,  or  through 
fomenting  strikes,  following  up  salesmen  and  using  forcible 
methods  of  hindering  sales,  and  similar  crude  devices,  have 
been  used. 

Unfair  Competition  and  the  Public:  Conclusion. — The 
practices  mentioned  in  this  discussion  are  practically  all  of 
no  direct  benefit  to  the  public.  On  4he  other  hand,  they 
hinder  the  trade  of  competing  firms,  and7"so  far  as  the  injured 
firms  are  as  efficient  or  more  efficient  than  the  dishonest  or 
unscrupulous  competitors,  concerns  may  be  eliminated  from 
production  and  distribution  which  it  would  be  to  the  interest 
of  society  to  retain.  These  practices  show  some  of  the  ex- 
cesses of  our  competitive  regime,  which  must  be  curtailed  if 
the  best  results  are  to  be  achieved. 


CHAPTER  XXIII 
THE  RELATION  OF  THE  STATE  TO  MARKETING 


In  the  preceding  chapters  consideration  has  been  given  to 
some  of  the  more  important  activities  of  the  state  which  affect 
marketing.  In  the  present  chapter  governmental  efforts  will 
be  further  considered,  in  order  to  show  their  objects  and  their 
effects  upon  the  distribution  of  goods.  The  question  of  the 
relation  of  the  state  to  marketing  is  the  most  important  part 
of  the  broader  problem  of  the  relation  of  the  state  to  industry. 
Its  discussion  at  this  time  is  peculiarly  pertinent.  In  the 
United  States,  as  in  foreign  countries,  central,  state,  and  local 
governments  are,  more  and  more,  restricting,  regulating,  in- 
vestigating, and  studying  trade  and  industry.  They  are  also, 
in  increasing  degree,  supplying  aid  and  information.  There 
is,  thus,  a  trend  toward  a  greatgrjnterest  of  government  in 
business.  But  with  bureaus,  commissions,  investigation,  re- 
striction, and  various  forms  of  assistance  to  industry  on  the 
one  hand,  and  with  distinct  opposition  to  these  efforts  on  the 
other,  no^definite  policyjias  been  accepted. 

Tgpes  of^tate^ffbrrr^elative"Tmportance. — Existing 
state  activities  have  been  divided  into  (1)  those  which  are 
necessary — namely,  those  functions  which  must  be  performed 
if  the  existence  of  government  is  to  be  justified;  (2)  those 
which  are  natural,  or  normal,  but  not  necessary;  and  (3)  those 
which  are  neither  natural  nor  necessary,  but  which  are  often 
exercised.1  Among  the  "necessary"  functions  Garner  places 
the  maintenance  of  internal  order,  peace,  and  safety,  the  pro- 

1 J.  W.  Garner,  Introduction  to  Political  Science  (1910),  pp.  318-320. 

473 


474  PRINCIPLES  OF  MARKETING 

tection  of  persons  and  property,  and  the  maintenance  of  ex- 
ternal security.  As  natural  or  normal,  but  not  necessary,  he 
enumerates  such  efforts  as  the  postal  service,  the  construction 
and  maintenance  of  dikes,  bridges,  lighthouses,  harbors,  and 
canals,  the  maintenance  of  scientific  and  statistical  bureaus, 
protection  of  the  poor,  education,  and  the  regulation  of  trades 
and  of  business.  These  services  are  important  to  the  public 
welfare,  and  they  would  be  unprofitable  or  impossible  of 
performance  by  private  enterprise.  Among  those  which  are 
considered  to  be  neither  natural  nor  necessary  but  frequently 
undertaken  are  the  construction,  operation,  and  maintenance 
of  railways,  telegraph  and  telephone  lines,  gas  and  electric 
plants,  and  waterworks;  the  encouragement  of  industries  by 
bounties,  tariffs,  and  subsidies;  and  loans  to  farmers,  rail- 
roads, and  industrial  concerns. 

The  Conflict  of  Interests. — The^ftasLxxjreme  opponents  of 

business  selcbm  contend 
kind  are  unjustfHecT  XncPthe  great  ma- 
"jority  of  peoplu  agree  that  the~T5eriormanfce  of  the  second  group 
of  activities,  and  in  a  less  degree  even  those  of  the  third,  is  a 
desirable  function  of  government.  This  is  true  except  perhaps 
when  such  acts  interfere  with  private  interests.  For  example, 
when  a  bounty  or  tariff  protecting  a  particular  industry  is 
advocated,  those  who  would  benefit  from  the  proposed  pro- 
gram are  likely  to  support  that  special  policy.  But  these 
very  interests  may  fight  bitterly  against  any  effort  to  "control" 
the  profits  of  their  business,  to  establish  a  minimum  wage  for 
their  employees,  or  to  enforce  requirements  looking  to  the 
diminution  of  the  evil  results  of  adulteration. 
\  In  England  and  the  United  States,  where  the  theory  that 
tne  state  should  let  business  alone  is  most  strongly  advocated, 
government  activity  has  nevertheless  extended  into  each  of 
the  three  fields  which  have  been  mentioned.^  This  was  true 
even  before  the  World  War.  During  the  War,  government 
control  developed  rapidly  and  to  a  great  extent  that  tendency 
persists.  There  are  signs  that  seem  to  point  to  a  reaction,  but 


THE  RELATION  OF  THE  STATE  TO  MARKETING    475 

it  appears  to  be  more  likely  that  the  events  of  the  World  War 
caused  a  permanent  increase  in  the  exercise  of  government 
control  over  business. 

It  is  interesting  to  consider  the  degree  to  which  various 
interests  turn  to  the  government  for  assistance  in  carrying  out 
particular  reforms  or  for  special  assistance  and  privileges. 
The  President  is  asked  to  bring  pressure  to  bear  to  prevent  a 
railway  strike;  and  the  Secretary  of  Commerce  is  named  as 
one  who  should  be  called  upon  to  settle  a  proposed  coal  strike. 
State  legislatures  are  asked  to  pass  laws  to  prevent  the  in- 
crease of  rents.  The  Adamson  Eight-Hour  Law  is  forced 
through  Congress  by  railroad  labor  and  the  Transportation 
Act  of  1920  is  forced  through  by  railroad  investors.  Agricul- 
tural interests  try  to  have  legislation  passed  which  will  abolish 
produce  exchanges,  and  succeed  in  having  one  law  enacted 
which  gives  a  certain  degree  of  control  over  the  exchanges  to 
the  Secretary  of  Agriculture  and  another  which  gives  him 
supervision  over  the  stock  yards.  Manufacturers  endeavor  to 
have  a  protective  tariff  established  and  American  shipping 
interests  are  insistent  in  demanding  a  ship  subsidy,  freedom 
from  paying  tolls  for  the  use  of  the  Panama  Canal,  and  the 
repeal  or  amendment  of  the  Seamen's  Act. 

Two  Opposing  Views  of  Governmental   Regulation.2 — 

2  There  is  a  short,  well  selected  collection  of  references  on  the  rela- 
tion of  government  to  industrial  activity  in  L.  C.  Marshall,  Readings 
in  Industrial  Society,  pp.  1019-1082.  See  also  W.  S.  McKechnie,  The 
State  and  the  Individual  (1896) ;  R.  G.  Tugwell,  ''Economic  Basis  for 
Business  Regulation,"  American  Economic  Review,  Vol.  XI,  No.  4 
(Dec.,  1921),  pp.  643-658;  Adam  Smith,  Wealth  oj  Nations;  J.  W. 
Garner,  Introduction  to  Political  Science;  H.  C.  Adams,  "An  Interpreta- 
tion of  the  Social  Movements  of  Our  Times,"  International  Journal  oj 
Ethics,  Vol.  II  (Oct.,  1891),  pp.  32-50,  and  his  "Relation  of  the  State 
to  Industry,"  Publications  oj  the  American  Economic  Association,  Vol. 
I  (1887),  pp.  465-549;  C.  R.  Van  Hise,  Concentration  and  Control;  S. 
P.  Orth,  The  Relation  oj  Government  to  Property  and  Industry;  J.  T. 
Young,  The  New  American  Government  and  Its  Work;  Annual  Reports 
of  the  Federal  Trade  Commission  and  of  other  government  bodies;  R. 
T.  Ely,  Socialism  and  Social  Reform,  and  French  and  German  Socialism; 


476  PRINCIPLES  OF  MARKETING 

There  are  two  contrasting  points  of  view  concerning  the  pro- 
cedure by  which  a  government,  in  its  relations  to  business, 
can  best  promote  the  public  interest.  At  one  extreme  is  the 
view  thatjthere  should  be  no  interference  with  business  in  ^ajjy 
5Kayv-  This  attitude  rests  on  tli(j  assumption  trla^"  although 
individuals  when  unhampered  by  the  government  will  seek 
their  own  selfish  interest,  this  interest  will  in  the  long  run 
make  them  act  in  ways  that  will  prove  advantageous  to  all 
At  the  other  extreme  is  the  view  that  the  state  should  closely 
regulate  and  control  business,  and  even  that  it  should  own 
and  operate  industries. 

Laissez  faire. — The  first  point  of  view,  the  laissez  faire 
policy,  if  carried  to  an  extreme,  would  mean  the  absence  of 
all  governmental  regulation  or  assistance  of  business.  This 
view  is  seldom  held.  A  more  moderate  view  was  expressed 
by  Adam  Smith  in  the  third  quarter  of  the  eighteenth  century : 

"All  systems  either  of  preference  or  restraint,  therefore,  being 
thus  taken  away,  the  obvious  and  simple  system  of  natural  liberty 
establishes  itself  of  its  own  accord.  Every  man,  as  long  as  he  does 
not  violate  the  laws  of  justice,  is  left  perfectly  free  to  pursue  his 
own  interest  in  his  own  way,  and  to  bring  both  his  industry  and 
capital  into  competition  with  those  of  any  other  man,  or  order 
of  men.  The  sovereign  is  completely  discharged  from  a  duty,  in  the 
attempting  to  perform  which  lie  must  always  be  exposed  to  innu- 
merable delusions,  and  for  the  proper  performance  of  which  no 
human  wisdom  or  knowledge  could  ever  be  sufficient;  the  duty  of 
superintending  the  industry  of  private  people,  and  of  directing  it 
towards  the  employments  most  suitable  to  the  interest  of  society."  a 

This  view  leaves  to  government  only  the  protection  of  society 
from  violence,  injustice,  and  oppression,  and  the  performance 
of  certain  necessary  public  works  which  could  not  be  profit- 
ably developed  by  private  firms. 

In  contrast  to  Smith's  view  were  the  conditions  actually  ex- 
John  Rae,  Contemporary  Socialism;  O.  D.  Skelton,  Socialism:  A  Critical 
Analysis;  John  Spargo,  Syndicalism,  Industrial  Unionism,  and  Social- 
ism; C.  E.  Merriam,  American  Political  Ideals. 

3  Wealth  of  Nations,  Book  IV,  Chap.  IX  (Cannan's  edition),  p.  184. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  477 

isting  just  previous  to  his  time,  conditions  against  which  he 
was  protesting.     Thus  in  marketing  alone, 

"In  England,  formerly,  practically  all  combinations  and  almost 
all  of  the  modern  forms  of  commercial  organization  were  unlaw- 
ful. The  business  of  the  middleman  was  unlawful;  the  business 
of  the  modern  wholesale  grocer  was  unlawful.  It  was  a  criminal 
offense  to  buy  food  or  victuals  which  were  on  their  way  to  the 
market  for  the  purpose  of  reselling  them,  or  to  buy,  for  purpose 
of  resale,  large  quantities  of  goods  at  any  time."  * 

Extreme  Interference. — At  the  other  extreme  from  the 
laissez  jaire  policy  are  proposals  for  extensive  state  inter- 
ference and  activity  in  the  realm  of  business.  Opposite  ends 
prompt  the  advocacy  of  this  view.  There  are  some  who  be- 
lieve that  only  by  the  development  of  extreme  forms  of  gov- 
ernmental control  can  business  effort  promote  the  greatest 
individual  welfare.  It  is  argued  that  individualism  without 
government  control  causes  business  operations  to  be  guided 
into  channels  which  are  not  in  the  interest  of  the  great  body 
of  the  people,  either  collectively  or  as  individuals.  This  seems 
to  be  the  view  of  many  socialists,  as  well  as  of  many  who 
are  more  moderate.  Others  who  favor  an  extreme  control  of 
business  by  the  government,  desire  it,  not  in  the  interests  of 
individuals  as  such,  but  because  they  believe  that  the  state 
as  an  abstract  concept,  or  as  the  private  interest  of  a  ruling 
group,  can  in  this  way  best  be  fostered. 

II 

The  Relations  of  Government  to  Business. — In  practice, 
both  points  of  view — the  laissez  jaire  policy  and  the  policy  of 
extreme  supervision  of  business  affairs — exercise  an  influence 
on  the  everyday  evolution  and  functioning  of  governments. 
And  regardless  of  particular  theories  concerning  their  desir- 
ability, the  governmental  activities  which  affect  business  are 
now  numerous. 

4  A.  A.  Bruce,  "Laissez  Faire  and  the  Supreme  Court  of  the  United 
States,"  The  Green  Bag,  Vol.  XX  (1908),  p.  553. 


478  PRINCIPLES  OF  MARKETING 

(1)  Some  of  these  activities  are  primarily  negative  in  their 
immediate  effects^  Their  purpose  is  to  prevent  actions  which 
are  contrary  to  the  public  interest— such  as  the  prevention 
of  adulteration  and  fraud,  the  curbing  of  monopoly  and  re- 
straint of  trade,  and  the  elimination  of  unfair  competition. 
Specific  examples  are  found  in  pure  food  laws,  in  the  anti- 
trust acts,  in  certain  sections  of  the  Clayton  Anti-Trust  Act 
and  of  the  Federal  Trade  Commission  Act,  as  well  as  in  a 
large  body  of  common  law  doctrine.  The  Sherman  Anti-Trust 
Act,  for  example,  declares  that 

"Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  is  hereby  declared  to  be  illegal.  .  .  . 

"Every  person  who  shall  monopolize,  or  attempt  to  monopolize,  or 
combine  or  conspire  with  any  person  or  persons,  to  monopolize  any 
part  of  the  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misdemeanor " 

Sections  2  and  5  of  the  Clayton  Anti-Trust  Act  also  deal 
with  marketing  topics.  The  provisions  are  in  the  spirit  of 
those  of  the  Sherman  Act  but  are  more  specific.  Thus  in  Sec- 
tion 2  it  is  declared, 

"That  it  shall  be  unlawful  for  any  person  engaged  in  commerce,  in 
the  course  of  such  commerce,  either  directly  or  indirectly,  to  dis- 
criminate in  price  between  different  purchasers  of  commodities, 
.  .  .  where  the  effect  of  such  discrimination  may  be  to  substantially 
lessen  competition  or  tend  to  create  a  monopoly  in  any  line  of 
commerce." 

Section  5  of  the  Federal  Trade  Commission  Act  states, 

"that  unfair  methods  of  competition  in  commerce  are  hereby  de- 
clared unlawful. 

"The  Commission  is  hereby  empowered  and  directed  to  prefent 
persons,  partnerships,  or  corporations,  except  banks  [which  are 
otherwise  controlled],  and  common  carriers  subject  to  the  acts 
to  regulate  commerce,  from  using  unfair  methods  of  competition 
in  commerce." 


THE  RELATION  OF  THE  STATE  TO  MARKETING  479 

(2)  Then  there  is  what  miy  hn  nnlloH  '^prnvngfynz"  inter- 
vention,5 such  as  the  enforcement  of  contracts,  the  enactment 
of  laws  which  promote  the   formation  of  corporations  and 
cooperative  associations,  and  legal  provisions  for  the  limitation 
of  liability  on  the  part  of  certain  classes  of  investors.     Of  as 
great  importance  as  these,  and  fundamental  to  all  efficient 
marketing,  are  the  promotion  and  assistance  of  transportation 
— financial  aid  to  shipping  companies,6  the  exercise  of  the  right 
of  eminent  domain  to  obtain  rights  of  way  for  railroads  and 
for  opening  new  highways.     Other  important  promotive  ef- 
forts are  the  establishment  of  standard  commodity  grades, 
standard  containers,  and  standard  bills  of  lading  and  ware- 
house receipts,  the  law  of  sales,  contracts,  and  the  like.    Of 
less  importance,  but  of  great  usefulness,  are  the  investigations 
of  methods  of  marketing,  and  information' and  advice  for  those 
who  are  interested  in  marketing.     The  market  news  service 
of  the  Department  of  Agriculture  and  the  trade  promotion 
work  of  the  Department  of  Commerce  are  further  examples.7 

(3)  Finally,  there  are  what  are  called  "mandatory"  acts  of 
government,   because   of  their   positive   compulsory   nature.8 
Public  utilities  are  compelled,  to  some  extent  regardless  of  the 
financial  results  to  them,  to  charge  only  a  reasonable  price 
for  their  services — which  is  positively  or  negatively  deter- 
mined by  administrative  officials  or  legislatures — to  treat  all 
customers  of  a  class  alike,  to  serve  all  who  will  pay,  to  buy 
essential  equipment,  and  to  extend  service  when  and  where 
the  public  interest  appears  to  governing  officials  to  require  it.9 

'See  H.  E.  Oliphant,  "Legal  Intervention  in  Business,"  in  L.  C. 
Marshall,  Readings  in  Industrial  Society,  pp.  1015-1018. 

*  The  desirabality  of  such  assistance  is,  of  course,  questioned  by  many 
people. 

7  See  Chap.  XVIII  for  a  discussion  of  market  news. 

8H.  E.  Oliphant,  op.  cit. 

"The  acts  of  legislatures  and  administrative  officers  are,  of  course, 
subject  to  review  by  the  courts.  See  J.  T.  Young,  The  New  American 
Government  and  Its  Work,  Chaps.  XV,  XXIII;  C.  A.  Board,  American 
Government  and  Politics,  Chaps.  XV,  XXVI. 


480  PRINCIPLES  OF  MARKETING 

The  marking  of  the  content  of  certain  foods  and  drugs  on 
containers,  as  directed  by  the  Pure  Food  and  Drug  Act,  and 
the  marking  of  the  net  contents  of  packaged  goods  on  the 
package,  are  further  examples.  Finally,  there  has  been  con- 
siderable agitation  in  recent  years  for  such  things  as  the  com- 
pulsory sale  of  products  held  for  resale,10  and  the  marking  on 
containers  of  the  prices  at  which  producers  sell. 

Ill 

The  government  activities  which  bear  directly  on  marketing 
can  be  conveniently  divided  into  three  classes:  X1  (|)  those 
which  are  intended  to  elevate  the  plane  of  competition;  ($] 
those  which  aim  to  control  monopoly;  and  (Sj)  those  which 
are  planned  to  promote  the  technical  efficiency  of  marketing.12 

"President  Wilson  included  this  suggestion  in  a  message  to  Con- 
gress, Dec.  2,  1919.  See  Congressional  Record,  Vol.  59,  p.  30. 

"The  first  two  parts  of  this  classification  were  suggested  by  the 
articles  of  H.  C.  Adams  mentioned  in  note  2,  p.  475. 

12  Governmental  action  which  is  of  direct  importance  to  marketing 
can  also  be  classified  as  affecting  price,  service,  or  quality.  That  is,  we 
can  base  a  classification  on  the  effect  that  governmental  activity  has 
upon  the  three  important  measures  which  the  consumer  places  on  the 
market  functionaries  and  the  three  important  types  of  "selling  point" 
which  are  used  in  the  creation  of  demand.  The  following  table  is  sug- 
gestive of  this  classification: 

OUTLINE  OF  GOVERNMENT  ACTIVITIES  :  BASIS  OF  SELLING  ARGUMENT 

1.  Acts  affecting  prices 

Price-fixing  and  rationing 

Control  of  transportation  rates 

Inspection  and  grading 

Food  and  drug  control 

Taxes 

Acts  affecting  quantity — control  of  weights  and  measures 

2.  Acts  affecting  service 

Enforcement  of  contracts 

Control  of  transportation  and  storage  facilities 

Inspection  and  grading 

Licensing  business  houses 

Control  of  commission  men  of  the  agricultural  market 


THE  RELATION  OF  THE  STATE  TO  MARKETING  481 

(i)  Efforts  to  Elevate  the  Plane  of  Competition.— The 
first  group,  comprising  those  efforts  which  are  designed  to 
elevate  the  plane  of  competition,  purposes  to  retain  the  benefits 
which  result  from  competition,  and  yet  to  exclude  those  mani- 
festations of  competition  which  seem  to  thwart  the  best  inter- 
ests of  society.13  There  is  no  unanimity  of  opinion  as  to  what 
forms  of  control  the  government  should  utilize  in  doing  this, 
and  there  is  no  agreement  as  to  just  what  constitute  unde- 
sirable forms  of  competition.  There  is  even  no  agreement  as 
to  the  meaning  of  competition.  To  some,  it  implies  the  ab- 
sence of  all  governmental  interference  in  business,  a  clear 
field  and  no  favors,  with  the  "survival  of  the  fittest."  But 
under  modern  conditions  a  policy  of  this  kind  has  frequently 
resulted  in  domination  by  the  most  powerful  firms  and  com- 
binations or  by  the  least  scrupulous  competitors.1*  These 
are  not,  necessarily,  those  industrially  and  commercially  most 
fit  to  survive,  and  so  the  interests  of  the  general  public  are 
thought  to  suffer  under  these  conditions.  A  good  deal  of  state 
supervision  of  business,  consequently,  is  necessary  even  to  pre- 
serve the  "benefits  of  competition."  15 

Although  there  is  no  general  agreement  as  to  just  what 
forms  of  competition  ought  to  be  eliminated — in  the  sense 
that,  in  the  long  run,  they  are  against  public  interest,  as  well 
as  against  the  interests  of  particular  competitors  or  consumers 
who  are  immediately  concerned — there  can  be  little  question 
of  the  general  principle  involved.  The  reason  for  govern- 
mental interference  rests  primarily  on  the  fact  that  these 
practices,  when  undesirable,  cannot  be  effectively  prevented 
by  the  aggrieved  party — at  least  not  without  recourse  to  simi- 

3.    Activities  affecting  quality 

Pure  food  and  drug  acts 

Establishment  of  standards 

Laws  against  fraud  and  adulteration  of  products. 
"  Some  of  these  forms  of  competition  were  described  on  pp.  466-472. 
"Some  illustrations  of  this  point  were  described  on  pp.  466-471. 
15  The  "benefits  of  competition"  are  reviewed  on  pp.  500-501. 


482  PRINCIPLES  OF  MARKETING 

lar  acts,  leading  to  further  reprisals.  They  can  be  done  away 
with,  consequently,  only  by  associative  action  or  by  means 
of  governmental  interference. 

The  Efforts  of  Associations. — Much  has  been  done  by  asso- 
ciations of  business  men  to  prevent  unfair  competition. 
But  membership  in  these  is  voluntary,  and  the  members 
of  the  trade  who  use  unfair  methods  may  be  the  very 
ones  who  refuse  to  join  an  association  or  to  be  bound 
by  its  rules.  In  case  they  do  join,  they  may  exert  their 
influence  against  wholesome  regulations.  Again,  after  regu- 
lations have  been  adopted  they  remain  to  be  enforced. 
This  may  be  impossible  without  the  compelling  force  of  the 
government.16  Furthermore,  trade  associations  are  slow  to 
develop  regulations  governing  customs  which  are  of  primary 
interest  to  those  outside  the  trade.  The  only  redress  for 
these  is  to  go  to  court — a  slow  and  costly  process — to  form 
associations  of  their  own  to  combat  these  evils,  or  to  "get  a 
law  passed"  or  an  administrative  agency  established  to  pro- 
tect their  interests.  This  failure  of  the  business  men  of  a 
particular  trade  to  meet  the  demand  of  outside  interests  for 
the  correction  of  abuses  often  leads,  consequently,  to  a  resort 
to  politics.  Appeals  are  made  to  the  legislature  for  aid,  or 
politicians  make  the  case  of  the  aggrieved  party  their  own. 
Then  the  legislature  starts  out  to  do  what  the  trade  itself 
should  have  done.  Legislative  action  of  this  kind  is,  further- 
more, often  unwise,  and  frequently  imposes  onerous  and  un- 
necessary burdens  on  business. 

16  This  is  sometimes  done,  as  when  courts  enforce  decisions  made  by 
committees  of  produce  exchanges  in  settling  disputes  between  members, 
or  even  between  members  and  non-members — when  the  latter  have 
agreed  to  abide  by  the  committees'  decisions.  The  Chicago  Association 
of  Commerce  is  now  using  a  scheme  in  which  an  impartial  third  party, 
hired  by  the  Association,  adjudicates  business  disputes.  This  plan  is 
being  adopted  by  other  associations  of  business  men,  and  the  Chamber 
of  Commerce  of  the  United  States  of  America  has  recently  started  the 
machinery  for  adjudicating  disputes  between  parties  in  different 
localities. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  483 

When  business  men  engage  in  fighting  these  bills,  or  in  con- 
testing unwise  laws  already  passed,  the  general  public  re- 
ceives an  unfavorable  impression  of  their  attitude  toward 
the  public  interest.  It  is  an  interesting  commentary  on  the 
short-sightedness  or  innate  selfishness  of  business  interests 
that  they  so  often  appear  to  be  fighting  legislation,  which  was 
designed  to  meet  generally  recognized  evils,  rather  than  as- 
sisting in  the  solution  of  those  problems.  Large  numbers  of 
business  men  persist  in  practices,  condemned  by  the  public, 
and  often  by  other  business  men,  long  after  the  obnoxious  acts 
have  been  forcibly  called  to  their  attention.  Yet,  they  should 
know  that,  in  the  end,  legislation  designed  to  prevent  these 
acts  is  almost  certain  to  be  passed.  And  even  though  it  is 
not  passed,  the  airing  of  business  practices,  by  prejudiced  per- 
sons and  by  politicians,  gives  to  the  whole  trade  a  reputation 
which  is  based  upon  the  unfair  methods  of  a  few.  It  is  even 
common  for  practices  long  since  suppressed  to  be  brought 
again  before  the  public.  Much  of  the  present  day  sympathy 
with  legislation  designed  to  regulate  the  packers,  the  rail- 
roads, and  produce  exchanges,  arises  from  the  memory  of  prac- 
tices long  cast  aside!  The  short-sightedness  of  the  building 
trades  in  some  of  the  larger  cities  at  the  present  time  is  likely 
to  react  to  their  disadvantage  for  years — whether  or  not  they 
reform  their  habits  and  whether  or  not  the  indictments  now 
standing  are  proved.  The  inability  of  the  railroads  to  deal 
with  the  rebate  evil;  the  failure  of  the  railroads,  terminal 
elevators,  and  grain  exchanges  to  solve  effectively  the  terminal 
elevator  problem;17  the  persistence  of  "big  business"  in  flout- 
ing or  ignoring  the  public  interest — these  are  examples  of  ques- 
tions which  involve  the  relation  of  business  to  the  public, 
and  of  classes  of  business  with  each  other.  In  each  case  the 
failure  of  the  parties  involved  to  come  to  a  suitable  agree- 
ment has  caused  the  government  to  restrict,  regulate,  and 
control. 

"See  J.  E.  Boyle,  Speculation  and  the  Chicago  Board  of  Trade,  pp. 
97-113. 


484  PRINCIPLES  OF  MARKETING 

Finally,  associations  of  business  men  may  themselves  de- 
velop undesirable  business  practices  which  the  government 
must  control.  Among  the  most  common  of  these  is  the  mak- 
ing of  agreements  concerning  prices,  an  act  which  is  usually 
felt  to  be  contrary  to  the  public  interest.  The  exact  legal 
limits  to  the  acts  of  associations  in  relation  to  prices  have 
not  yet  been  determined  by  the  courts.  But  their  efforts  have 
frequently  been  held  to  overstep  the  bounds  of  public  policy.18 
They  must,  apparently,  be  watched  and  controlled  by  the 
state. 

Mandatory  Acts  which  Elevate  the  Plane  of  Competition. 
—The  enforcement  of  contracts  and  the  tendency  to  moderate 
the  rule  of  cmie&tr-erffpTor  tend  also  to  elevate  the  plane  of 
competition.  Business  is_  dependenLjipon  the  enforcement  of 
contralto: — it  cannolTbe  carried  on  without  a  proper  regard 
for  contractual  obligations.  Trade  associations  have  done 
much  to  standardize  contracts  and  to  provide  machinery  for 
arbitrating  questions  arising  therefrom.  But  back  of  all,  the 
power  of  the  courts  to  enforce  contracts  looms  as  a  restrain- 
ing influence  on  the  contract-breaker.  The  fact  that  a  con- 
tract can  be  enforced  at  law  is  an  important  element  in  mak- 
ing such  enforcement  unnecessary,  and  consequently,  in  ex- 
pediting business. 

The  increased  variety  of  goods  now  offered  for  sale,  the 
development  of  sale  by  sample  and  description,  and  the 
growth  of  large  scale  business,  have  made  it  necessary  to 
mitigate  the  old  rule  of  caveat  emptor.  Trade  associations 
have  also  accomplished  much  in  this  direction.  But  for  the 
protection  of  the  final  consumer  and  of  many  small  traders  it 
appears  that  only  the  state  has  thus  far  acted  effectively. 
Good  illustrations  of  legislation  designed  to  protect  the  buyer, 
and  in  some  cases  the  seller,  from  competition  which  leads 
to  short  weight,  adulteration,  and  similar  evils,  are  the  pure 
food  and  drug  acts  of  the  Federal  and  state  governments,  the 
Federal  meat  inspection  act,  and  the  Federal  Trade  Commis- 

18  See  pp.  389-390. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  485 

sion  Act.  The  first,  for  example,  is  an  attempt  to  prevent 
adulteration  and  misbranding,  to  make  all  drugs  conform  (in 
the  case  of  the  Federal  act)  to  standards  of  purity  determined 
by  the  national  pharmacopoeia,  and  to  force  manufacturers 
and  vendors  to  state  on  containers  of  canned  foods  and  patent 
medicines  their  content  of  dangerous  drugs.  The  Federal  act 
provides  for  an  administrative  agency,  the  Bureau  of  Chem- 
istry of  the  Department  of*  Agriculture,  which  is  empowered 
to  take  the  initiative  in  enforcing  the  act.19  The  regulation 
of  weights  and  measures  is  another  illustration  of  this  kind 
of  legislation,  and  somewhat  in  this  vein  is  the  Federal  Produce 
Inspection  Act  passed  in  1919.  This  law  gives  the  Depart- 
ment of  Agriculture  power  "to  investigate  and  certify  to 
shippers  and  other  interested  parties  the  quality  and  condi- 
tion of  fruits,  vegetables,  poultry,  butter,  hay,  and  other 
perishable  farm  products,  when  received  in  interstate  com- 
merce," 20  at  important  central  markets.  Other  examples  of 
state  efforts  designed  to  elevate  the  plane  of  competition  are 
shown  in  Outline  I. 

OUTLINE  I:  GOVERNMENT  EFFORTS  TO  ELEVATE  THE  PLANE  OF 
COMPETITION 

1.  Establishment  and  enforcement  of  standards 

a.  Monetary  regulation  and  banking  laws 

b.  Standardization    of    money,    credit    instruments,    weights, 

measures,   and   commodity  grades 

2.  Restriction  of  unfair  trade  practices 

a.  Common  law  doctrine  designed  to  maintain  fair  conditions 

of  trade  and  competition 

b.  Control  of  trade  practices 

(1)  Federal  and  state  anti-trust  acts 

(2)  Federal  Trade  Commission  Act 

(3)  Legislation    controlling   the    activities    of   produce   ex- 

changes and  commission  merchants 

"See  the  annual  reports  of  the  Bureau  of  Chemistry. 

10 See  Rules  and  Regulations:  Food  Products  Inspection  Law  of  March 

3.  1921,  Circular  No.  155,  Office  of  the  Secretary,  U.  S.  Department  of 
Agriculture,  August,  1921. 


486  PRINCIPLES  OF  MARKETING 

c.  Control  of  transportation  rates  and  services;  allocation  of 

cars;    elimination    of    discrimination    between    persons, 
places,  and  commodities 

d.  Statutes  concerning  patents,  copyrights,  trade-marks 

3.    Restraint  of  fraud,  adulteration,  and  the  sale  of  harmful  prod- 
ucts 

a.    Common  law  doctrine 
fc.    Pure  food  and  drug  acts  (federal,  state,  and  local) 

(1)  City  ordinances  concerning  the  milk  supply 

(2)  Inspection  of  meat  and  cold  storage  products 

(3)  Regulation  of  the  duration  of  storage 

(4)  Prohibition  of  adulteration  of  products 

(5)  Prohibition  of  false  labeling  and  false  branding 

c.  Control  of  weights  and  measures :  including  requirement  of 

statement  of  net  content  of  packaged  goods 

d.  Certain  aspects  of  state  control  of  banks,  insurance  com- 

panies, and  building  and  loan  associations 

e.  United  States  Bankruptcy  Act 

f.  Blue  sky  laws 

Legislation  of  the  kind  discussed  in  the  previous  para- 
graph has  become  necessary  because  the  average  consumer 
does  not  have  the  technical  knowledge  which  may  be  nec- 
essary to  protect  him  against  adulteration,  misbranding, 
and  similar  evils;  nor  does  the  average  consumer,  small 
producer,  or  vendor  have  the  financial  strength  which  is 
necessary  to  protect  him  against  unfair1  competitive  acts. 
The  small  volume  of  business  involved  in  many  transactions 
is  another  thing  which  may  justify  legislation  of  this  kind. 
The  average  small  buyer  does  not  have  the  time  to  de- 
termine qualities,  and  his  purchases  are  so  small  that  it 
would  prove  too  expensive  to  do  so.  He  must,  consequently, 
depend  upon  the  integrity  of  the  producer  and  vendor  of  the 
goods  he  purchases,21  or  upon  a  government  which  is  look- 
ing out  for  his  interests. 

The  important  characteristic  'of  legislation  of  this  kind  is 
that  an  administrative  agency  is  created,  charged  with  the 
duty  ol^rotejilin^thejjitiblic.  This  agency  acts  not  only  upon 

21  See  pp.  24-25  and  pp.  400-401. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  487 

the  complaint  of  injured  parties,  but  upon  its  own  initiative. 
It  devotes  its  time  to  the  protection  of  the  public.  This  kind 
of  activity  is  made  particularly  effective  because  it  is  possi- 
ble for  the  administrative  agency  to  prevent  undesirable  prac- 
tices. This  is  in  marked  contrast  to  ordinary  court  action 
which,  except  in  the  use  of  the  power  of  injunction,  takes 
place  after  the  act  has  been  committed.  Court  action,  more- 
over, is  usually  slow  and  expensive.  The  expense  alone  is 
commonly  prohibitive,  and  the  time  involved  is  so  great  that 
redress  in  the  courts  may  come  too  late  to  be  of  value  to 
the  injured  party. 

(2),  The  Control  of  Monopoly. — The  second  group  of  gov- 
ernmental activities  affecting  marketing,  includes  those  efforts 
aimed  to  protect  citizens  against  the  encroachments  of  such 
monopolies  as  are  the  fruit  of  the  industrial  revolution.22 
That  is,  when  the  greatest  industrial  efficiency  can  be  realized 
under  conditions  of  complete  or  partial  monopoly  (whether 
local,  sectional,  or  national)  some  form  of  control  is  necessary 
in  order  that  the  results  of  this  efficiency  may  be  assured  to 
the  public.  This  can  usually  be  accomplished  only  through 
governmental  action.  Some  businesses  of  this  kind  are  what 
may  be  called  "natural  monopolies."  They  are  usually  busi- 
nesses of  increasing  returns.23  Monopolies,  which  are  due  to 
the  privileges  of  the  patent  and  copyright  laws,  or  to  the 
control  of  natural  resources,  are  also  among  those  which  must 
be  regulated  in  the  public  interest.24 

22  H.  C.  Adams,  op.  cit.,  Publications  of  the  American  Economic  Asso- 
ciation, Vol.  I  (1886),  pp.  47-63. 

"Ibid.,  pp.  55-64. 

24  Efforts  to  break  up  those  "monopolies" — commonly  called  "trusts" — 
which  have  been  formed  by  private  initiative  to  control  competition 
or  to  remove  it,  are  of  the  first  class,  i.e.  to  control  competition.  The 
Webb  Act,  providing  for  combinations  in  foreign  trade,  is  perhaps  an 
exception,  since  it  provides  for  just  such  control  as  is  described  under 
the  second  class  to  be  exercised  by  the  Federal  Trade  Commission. 
For  further  information  on  this  act  see  recent  reports  of  the  Commission. 


488  PRINCIPLES  OF  MARKETING 

OUTLINE  II:  EFFORTS  TO  CONTROL  MONOPOLISTIC  TENDENCIES 

1.  Sherman  anti- trust  act 

2.  State  anti-trust  acts 

3.  Federal  Trade  Commission  Act 

4.  Interstate  Commerce  Commission  Act 

5.  Acts  regulating  public  utilities 

a.     State  railroad  and  warehouse  commissions 

6.  Wartime  activities  for  price-fixing  and  rationing  in  rields  nor- 

mally considered  competitive. 

Two  important  considerations  are  involved  in  the  forma- 
tion of  monopolistic  organizations,  such  as  public  utilities,  and 
of  combinations,  such  as  the  "trusts,"  which  tend  to  become 
monopolistic.  One  reason  for  the  public's  acquiesence  in  the 
formation  of  the  former  is  the  increased  effectiveness  and 
economy  which  result  from  unified  control  and  operation.  The 
same  reason  is  commonly  advanced  as  a  cause  for  the  forma- 
tion of  combinations  or  "trusts."  The  other  consideration  is 
the  desire  of  the  owners  of  the  monopoly  or  combination  to 
gain  control  of  the  sources  of  supply  of  the  service  or  com- 
modity so  as  to  control  competition  and  price.  It  is  now 
generally  accepted,  in  the  case  of  public  utilities,  that  monopo- 
listic conditions  do  lead  to  economy  in  operation  and  to  more 
efficient  service.  But  the  abuses  of  monopoly  are  also  recog- 
nized and  the  state  regulates  and  controls  service  and  charges 
in  the  public  interest. 

These  conditions  are  not  so  generally  accepted  in  the  case 
of  large  industrial  firms  and  combinations.  The  attitude  of 
American  legislatures  continues  to  be  one  of  opposition  toward 
industrial  combination.  The  evidence  is  not  entirely  con- 
clusive that  these  large  combinations  lead  to  economies 
which  are  important  enough  to  justify  the  monopolistic 
tendencies  and  unfair  methods  of  competition  which  they 
sometimes  exercise.  The  Sherman  Anti-Trust  Act  and 
many  state  anti-trust  acts  have  been  based  upon  the  idea 
that  these  combinations  restrain  trade  and  should  be 
abolished.  It  is  difficult  to  distinguish  between  combina- 


THE  RELATION  OF  THE  STATE  TO  MARKETING  489 

tions  which  do  exercise  an  unwarranted  restraint  of  com- 
petition and  those  which  do  not.  There  seems  to  be  a 
tendency,  however,  for  the  Federal  courts  in  interpreting  the 
Sherman  Act  to  distinguish  between  combinations,  or  large 
corporations,  operating  as  a  unit  and  thereby  achieving  any 
possible  economies  arising  from  unified  operation  in  produc- 
tion as  well  as  distribution,  and  those  loosely  formed  com- 
binations whose  operations  are  confined  to  efforts  to  control 
competition.  ^/In  the  case  of  the  United  States  v.  the  United 
States  Steel  Corporation,  the  court  held  25  that,  although  the 
corporation  might  hold  a  dominant  position  in  the  industry 
it  had  committed  no  acts  in  violation  of  the  Sherman  Act 
since  the  government's  suit  had  been  started,  and  also  that 
to  dissolve  the  corporation  might  cause  financial  and  economic 
disturbance.  Although  the  court  did  not  discuss  the  point, 
this  corporation  is  a  single  operating  unit.26  On  the  other 
hand  the  court  held  that  the  Hardwood  Lumber  Associa- 
tion was  a  combination  in  restraint  of  trade.27  Its  efforts 
controlled  competition.  And  it  was  a  combination  of  com- 
peting units  which  could  not  be  compared  with  a  single  operat- 
ing unit  of  large  size,  such  as  the  United  States  Steel  Cor- 
poration. 

State  Control  of  Competition  and  Monopoly. — The  first 
two  groups  of  government  activity — those  designed  to  ele- 
vate the  plane  of  competition  and  to  control  monopoly — are 
primarily  regulative  and  restrictive  in  their  nature.  Their 
purpose  is  to  do  away  with  abuses,  or  to  control  forms  of  busi- 

25  251  U.  S.  417.    The  case  was  decided  March  1,  1920. 

"This  decision  was  not  in  accord  with  those  rendered  in  the  case  of 
the  Standard  Oil  Company  (221  U.  S.  1)  and  American  Tobacco  Com- 
pany (221  U.  S.  106)  cases  in  1911,  but  the  majority  held  that  these 
corporations  had  been  law  breakers  from  their  inception,  and  there  was 
no  evidence  of  this  in  the  case  of  the  Steel  Corporation.  Two  members 
of  the  Supreme  Court  did  not  take  part  in  the  case  and  the  decision  of 
the  other  judges  was  four  to  three.  So  the  case  may  not  become  a 
precedent. 

27  See  pp.  38^-390. 


490  PRINCIPLES  OF  MARKETING 

ness  activity  which  are  socially  advantageous  if  kept  within 
proper  bounds.  Their  intent  is  not  primarily  to  promote  the 
technical  efficiency  with  which  business  is  carried  on.  It 
should  not  be  inferred,  of  course,  that  they  do  not  tend  to 
foster  efficiency.  That  is  usually  the  final  aim.  Their  imme- 
diate purpose,  however,  is  to  control  or  regulate  industry  in 
the  interest  of  the  general  public,  whether  that  leads  to 
greater  or  less  technical  efficiency  at  the  time.  In  fact,  the 
result  of  such  regulation  may  retard  technical  efficiency;  but 
when  this  is  true,  it  is  an  incidental  result  of  the  effort  to  guide 
business  into  channels  which  are  considered  to  be  more  con- 
sistent with  the  public  interest. 

There  are  thus  certain  types  of  state  action  which  seem 
to  be  imperative.  Among  these  is  the  exercise  of  the  power 
to  force  public  utilities — railroads,  gas  and  electric  plants, 
and  public  warehouses,  for  example — to  give  impartial  ser- 
vice. This  has  apparently  been  impossible  without  govern- 
ment regulation.  The  proper  functioning  of  business  is  now 
so  dependent  upon  public  utilities  that  even  though  recourse 
may  be  had  to  the  courts  when  unfair  methods  are  used  the 
process  is  too  slow  and  expensive — for  business  cannot  wait. 
A  chief  purpose  of  railway  control  has  been  the  prevention 
of  unfair  discrimination  in  rate-making  and  service  as  be- 
tween competing  persons  and  places.28  Another  important 
purpose  is  to  prevent  the  development  of  monopolistic  ten- 
dencies which  the  rebate  policy  tends  to  foster. 

(3)  Efforts  to  Make  Distribution  More  Effective.— The 
third  class  of  state  relations  to  marketing  consists  of  those 
efforts  designed  to  increase  the  technical  efficiency  with  which 
it  is  carried  on.  Many  of  these  have  already  been  de- 
scribed. There  are  a  number  of  important  activities  lead- 
ing toward  better  marketing  in  which  independent  business 
men,  particularly  those  operating  on  a  small  scale,  cannot 
engage.  This  is  the  case  either  because  they  have  not  the 

28  See  J.  T.  Young,  op.  cit.,  pp.  122-132;  W.  Z.  Ripley,  Railroads, 
Rates,  and  Regulation,  Chaps.  VI,  VII,  XIII-XVII,  XIX. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  491 

resources  or  because  legal  authority  is  lacking.  Among  these 
activities  are  investigation  and  research  into  existing  methods 
of  distribution,  the  collection  and  distribution  of  market 
information,  and  the  establishment  of  commodity  standards.29 
For  the  great  bulk  of  business  men  (including,  of  course,  farm- 
ers) activity  of  this  kind  can  be  effectively  carried  on  only 
by  associative  effort  or  by  the  government.  It  has  been 
quite  generally  assumed  that  the  state  could  perform  such 
services  most  effectively.  This  is  because  of  its  financial  re- 
sources and  because  government  agencies  are  sometimes  given 
the  legal  authority  to  collect  information  from  private  firms. 
The  importance  of  these  efforts  is  patent,  but  there  has  always 
been  a  question  as  to  whether  they  should  be  carried  on  by 
the  government. 

OUTLINE  III:     EFFORTS  TO  PROMOTE  EFFICIENCY  IN  MARKETING30 

1.  The  establishment  and  enforcement  of  standards 

a.  Monetary  and  banking  systems 

b.  Weights  and  measures 

c.  Standard  containers 

d.  Commodity  standards 

e.  Grading  and  inspection  systems 
/.  Standard  bills  of  lading 

g.    Standard  warehouse  receipts 

li.    Warehouse  inspection  and  license         ^ 

2.  Compelling  railroads  to  unity  of  action  and  improvement  of 

service 

a.    Transportation  Act  of  1920 
ft.    Public  utilities  regulation 

3.  City  plans — providing  for: 

a.    Better  location  of  wholesale  markets  and  railroad  terminals 
1}.    Establishment  of  "city  markets" 

4.  Financial  activities 

a.    Federal  Reserve  System 

fc.    War  Finance  Corporation  / 

c.     State  bank  control 

29  See  Chaps.  XV,  XVI,  XVIII,  XIX. 

30  It  will  be  seen  that  many  of  the  activities  which  aim  to  control 
competition  also  promote  efficiency  in  marketing. 


492  PRINCIPLES  OF  MARKETING 

5.  Research,  statistical,  inspection,  and  regulative  activities 
a.    Bureau  of  Foreign  and  Domestic  Commerce 

fc.  Consular  Service 

c.  Federal  Trade  Commission 

d.  Tariff  Commission 

e.  Bureau  of  Standards 
/.  Bureau  of  Census 

g.    Bureau  of  Markets  (state  and  national) 

h.    County  advisors 

i.    Universities  (state  and  municipal) 

6.  Bounties,  subventions,  tariffs31 
a.    Sugar  bounties 

fe.    Ship  subsidies 
c.    Tariff  restrictions 

7.  Restriction  of  activities  of  foreign  business  men  in  domestic 

and  colonial  markets 
a.    Restrictions  on  foreign  shipping  in  domestic  ports 

8.  Financial  aid  to  business  men 

a.  War  Finance  Corporation 

b.  Moritoria 

c.  Ship  Subsidies 

9.  Enforcement  of  Contracts 

10.    Direct  assistance  to  those  engaged  in  marketing 

a.    Issuance   of  government   pamphlets   advising   of   superior 

methods 
ft.    Parcel  post 

c.  State  and  Federal  market  bureaus 

d.  Efforts  of  state  market  bureaus  and  postmasters  to  bring 

buyers  and  sellers  together 

The  rapid  development  of  trade  associations  among  manu- 
facturers, middlemen,  and  farmers,  has  shown  that  many 
of  these  activities  can  be  successfully  performed  by  associated 
efforts.  If  the  consumer's  cooperative  movement  spreads 
from  Europe  to  this  country  and  if  the  growth  of  trade 
and  agricultural  associations  continues  at  the  present  rate, 
it  is  entirely  possible  that  many  of  the  activities  now  per- 
formed by  state  agencies,  as  well  as  others  which  are  now 
proposed,  will  be  taken  over  by  these  associations.  Then 

31  No  attempt  has  been  made  to  place  taxes  in  these  groups.  As  a 
rule  they  should  be  considered  as  a  distinct  class. 


THE  RELATION  OF  THE  STATE  TO  MARKETING  493 

the  position  of  the  state  in  relation  to  these  matters  would 
become  purely  regulative  and  mandatory.32  That  is,  the 
government  would  control  the  associations'  efforts  in  the  public 
interest.  It  might  also  be  called  upon  to  arbitrate  questions 
involving  conflicts  of  interest  between  associations,  and  finally 
it  might  enforce  decisions  which  had  been  made  by  arbitration 
boards  under  association  rules. 

33  On  this  problem  as  related  to  market  information  see  pp.  392-395. 


CHAPTER  XXIV 

THE  ELEMENTS  OF  MARKETING  EFFICIENCY  * 

To  criticize  our  marketing  system,  and  to  asperse  those  en- 
gaged in  marketing  has  long  been  popular  with  reformers  and 
demagogues.  But,  in  view  of  the  dearth  of  precise  informa- 
tion, to  criticize  the  existing  market  regime  in  more  than  gen- 
eral terms  is  scarcely  warranted.  Even  to  discuss  intelli- 
gently the  marketing  of  a  specific  product  or  the  effective- 
ness of  a  particular  market  institution  or  agency  necessitates 
the  greatest  care,  because  of  this  lark  of 


In  preceding  chapters  many  of  the  points  in  the  present 
system  of  marketing  which  call  for  criticism  have  been  dis- 
cussed, and  the  specific  efforts  which  are  being  made  to  im- 
prove these  conditions  have  been  mentioned.  It  is  the  pur- 
pose of  this  and  of  the  succeeding  chapters  to  point  out  the 
elements  of  market  ingefficiency  whichjinst-  bfr  pr 


^ 

JQ^evaluating  particular  market  mpfhnHs  flnH_jnstitutJQnsT 
fr>  pritiri£e_certain  aspects  ofjfiistribution,  and  to  point  out 
certain  ways  in  whiclijiDoyement  may  be 


oints  of  View.  —  Two  points  of 
view  must  be  kept  in  mind  in  an  attempt  to  analyze  market- 
ing efficiency.  Such  analysis  may  be  directed  from  the  point 
of  view  of  the  individual  enterpriser,  or  of  particular  classes 
j  of  business  men.  This  is  commonly  called  the  private  point  of 
view.  Investigations  like  those  which  have  been  carried  on 
by  the  Bureaus  of  Business  Research  of  Harvard  and  North- 
western universities  are  of  this  kind,  as  are  most  of  the  efforts 

1  Parts  of  this  chapter  are  taken  from  a  paper  which  was  read  at  the 
Thirty-third  Annual  Meeting  of  the  American  Economic  Association. 
This  was  published  in  the  American  Economic  Review,  Vol.  XI,  No.  2 
(June,  1921),  pp.  214-220. 

404 


THE  ELEMENTS  OF  MARKETING  EFFICIENCY    495 

of  the  United  States  Bureau  of  Markets,  and  of  the  bureaus 
of  commercial  research  maintained  by  some  large  business 
and  trade  organizations.  Other  analyses  are  carried  out  by 
investigators  who  are  not  interested  in  increasing  the  profits 
of  individual  firms  or  of  particular  classes  of  private  business 
organizations.  Such  investigators  take  what,  for  the  lack  of  a 
better  term,  may  be  called  the  social  or  public  point  of  view. 
Their  aim  is  to  study  the  social  significance  of  marketing.  In 
so  far  as  they  have  any  definite  aim  in  mind  other  than  the 
scientific  search  for  truth,  it  is  to  determine  how  marketing 
can  be  carried  on  in  such  a  way  as  to  improve  the  economic 
status  of  the  community  as  a  whole.  To  these,  marketing  ap- 
pears as  a  great  mechanism  for  bringing  goods  and  services 
from  producer  to  consumer.  This  mechanism  functions  im- 
perfectly at  times  and  involves  expensive  processes.  Con- 
sequently, it  is  worth  study  in  order  to  determine  whether  it 
can  be  made  to  function  more  effectively  and  more  eco- 
nomically. 

The  specific  lines  of  research  and  even  the  immediate  aims 
of  those  who  take  this  latter  point  of  view,  frequently,  per- 
haps usually,  coincide  writh  those  who  are  interested  only  as 
individuals,  or  as  the  representatives  of  a  large  class  of  enter- 
prisers. But  whereas  those  with  the  individual  perspective 
are  interested  because  they  seek  a  means  to  increase  indi- 
vidual profits,  these  latter  are  interested  in  individual  success 
only  in  so  far  as  it  tends  to  the  development  of  a  more  ef- 
fective and  a  more  economical  distributive  organization.  This 
second  point  of  view  is  that  of  the  following  discussion.  In 
the  last  analysis,  this  brings  those  who  are  individualistic  in 
tendency  to  the  position  of  the  consumer.  (The  social  end  o 
marketing,  as  of  production,  is  to  gratify  the  wants  of  con- 
sumers as  effectively  and  as  economically  as  possible^  And 
so  it  is  from  the  point  of  view  of  the  investigator  who  sees 
marketing  through  the  consumer's  eyes  that  the  component 
elements  of  marketing  efficiency  are  here  approached. 

Components   of   Marketing  Efficiency. — What,  then,   are 


496  PRINCIPLES  OF  MARKETING 

the  elements  to  be  considered  in  determining  the  efficiency 
of  our  market  organization,  and  of  the  particular  institutions 
of  which  it  is  composed?  First  among  these  must  be  con- 
sidered the  effectiveness  with  which  the  distributive  service  is 
rendered;  then,  the  cost  at  which  this  service  is  performed, 
cost  being  understood  to  include  actual  expenses  plus  what- 
ever profits  are  made  by  those  engaged  in  marketing, 
whether  they  be  producer,  consumer,  middleman,  or  functional 
agency.  And,  finally,  there  must  be  considered  the  effect^ 
which  this  cost  and  these  methods  of  performing  this  service 
have  upon  production  and  consumption.  In  other  words,  to 
determine  the  efficiency  of  our  market  organization  we  must 
answer  such  questions  as  these:  does  the  scheme  meet  our 
needs?  do  we  pay  more  for  the  performance  of  this  service, 
even  though  it  is  well  done,  than  we  should?  what  effect  does 
our  system  of  market  distribution  have  upon  production  and 
consumption?  If  the  system  is  effective  but  costly,  it  is  in- 
efficient. It  is  inefficient,  too,  when  it  is  cheap  but  ineffec- 
tive. And  even  though  the  mechanism  as  devised,  results  in 
the  effective  and  economical  distribution  of  commodities,  it  is 
not  efficient  if  it  exercises  an  unfavorable  influence  on  either 
production  or  consumption. 

Problems  of  Technical  Efficiency. — It  is  evident  that  the 
first  two  elements  of  marketing  efficiency,  service  and  cost, 
must  usually  be  studied  as  composing  one  problem,  although 
the  emphasis  of  a  particular  investigation  may  be  upon  ser- 
vice, or  upon  the  actual  money  cost,  or  on  the  trade  or  specu- 
lative profits  involved  in  the  performance  of  the  service.  Most 
of  the  problems  which  are  encountered,  perhaps  all  of  them, 
raise  broad  questions  of  technical  efficiency.  One  group  centers 
about  the  purely  mechanical  elements  involved  in  transporta- 
tion and  storage.  Among  these  are  questions  concerning  the 
effectiveness  of  the  facilities  for  shipping  and  warehousing,  and 
concerning  the  mechanical  equipment  and  physical  layout  of 
markets.  Difficulties  are  caused  by  poor  country  roads, 


THE  ELEMENTS  OF  MARKETING  EFFICIENCY    497 

limited  railway  facilities,  congested  terminals,  and  ill-planned 
wholesale  market  areas.  One  of  the  greatest  problems  in 
the  market  for  agricultural  products  is  found  just  here.  How 
can  the  advantages  derived  from  concentrating  at  these  cen- 
tral markets  the  forces  of  demand  and  supply  which  operate 
over  a  wjde  area  be  retained;  and  at  the  same  time,  how  can 
the  disadvantages  of  the  physical  congestion  of  the  market 
plants,  which  arise  from  the  resulting  tendency  to  force  an 
enormous  supply  of  actual  goods  through  these  markets,  be 
eliminated? 

Another  group  of  problems  concerns  the  methods  by  which 
title  to  goods  is  transferred  from  producer  to  consumer.  Here 
are  raised  a  number  of  questions  of  the  most  vital  importance. 
Among  them  are  those  which  relate  to  the  efficacy  of  the 
market,  np,wg  «PT*VIP.PJ  upon  which  we  depend  to  keep  demand 
and  supply  in  equilibrium ;  those  which  deal  with  the  adequacy 
of  the-price  system  to  correlate  properly  the  various  factors 
in  production  and  marketing;  those  which  concern  the  legal 
protection  of  the  parties  to  an  exchange;  those  which  relate 
to  the  great  costs  involved  in  buying  and  selling — including 
the  costs  of  standardization,  inspection  and  grading,  when 
these  services  are  performed,  the  increased  costs  of  bargain- 
ing, when  they  are  not  provided,  and  the  enormous  costs  of 
demand  creation.  Here  also  center  the  problems  which  arise 
from  the  presence  of  market  risks  and  the  necessity  for 
market  finance. 

These  two  groups  of  problems  concerning  the  technical  ef- 
ficiency of  our  market  machinery,  one  arising  out  of  what  may 
be  called  the  purely  mechanical  efficiency  of  the  plant,  the 
other  arising  out  of  what  may  be  called  the  trade  efficiency 
of  the  system  of  bargaining,  bear  directly  on  those  components 
of  efficiency  which  are  based  on  service  and  cost. 

Effects  of  Market  System  upon  Production  and  Consump- 
tion.— More  difficult  of  analysis,  but  no  less  important,  are 
the  problems  which  relate  to  the  influence  of  the  existing 


498  PRINCIPLES  OF  MARKETING 

market  institutions  upon  production  and  consumption.  They 
involve  some  most  interesting  and  illusive  considerations — 
considerations  which  the  business  man  and  the  economist 
learned  to  appreciate  only  when  the  World  War  magnified 
their  difficulty  and  increased  the  need  for  their  immediate 
solution. 

They  include  such  questions  as  the  effect  of  the  use  of  stand- 
ard grades,  when  it  results  in  improved  products  and  increased 
stability  of  income  to  producers.2  And  here,  too,  may  be  con- 
sidered the  effect  upon  production  when  the  market  organi- 
zation secures  to  the  producer  what  he  considers  to  be  a 
"just  share"  of  the  final  selling  price  of  his  product.  Here  is 
raised  the  whole  series  of  questions  concerning  the  results  on 
production  and  consumption  of  market  competition  and  of 
the  effects  of  particular  railway  rate  structures — basing  points, 
postage  stamp  rates,  commodity  rates,  rates  based  upon  a 
compromise  between  value  of  the  product,  weight,  distance, 
and  the  competition  of  other  carriers  and  of  outside  markets. 
Here,  likewise,  can  be  considered  the  effect  of  finance  and 
warehouse  methods  upon  the  production  of  perishable  and  sea- 
sonal commodities,  as  well  as  the  reactions  to  large  market 
areas  which  have  caused  the  growth  of  large  scale  and  spe- 
cialized production.  In  connection  with  consumption,  there 
is  need  to  investigate  the  tendency  for  modern  distributive 
methods  to.  make  available  to  consumers  a  large  variety  of 
commodities,  and  the  tendency  of  modern  selling  methods  to 
create  in  the  mind  of  the  consumer  a  demand  for  variety,  qual- 
ity, service,  style,  and  seasonable  goods. 

Criticism  of  the  Competitive  Regime. — Most  of  the  criti- 
cism of  modern  marketing  is  really  pointed  directly  or  indi- 
rectly at  our  competitive  regime  as  it  now  functions.  Even 
the  important  problems  of  the  physical  efficiency  of  transpor- 
tation, and  of  the  physical  congestion  of  central  market  areas, 
are  very  closely  bound  up  with  the  conditions  of  competition 
in  a  regime  of  private  property.  Most  of  the  proposed  reme- 

3  See  pp.  247-248. 


THE  ELEMENTS  OF  MARKETING  EFFICIENCY    499 

dies  and  reforms,  which  are  of  more  than  particular  appli- 
cation, propose  to  eliminate  our  present  competitive  system; 
or  else  they  involve  proposals  leading  to  an  increase  in  exist- 
ing forms  of  control  on  the  part  of  the  government,  or  to  an 
introduction  or  enlargement  of  the  control  exercised  by  pro- 
ducers, middlemen,  and  consumers  through  some  form  of  co- 
operation or  combination. 

It  has  been  shown  that  demand  and  supply  are  not  properly 
related.3  As  a  consequence  there  occur  what  are  popularly 
called  periods  of  over-  and  underproduction.  These  may  occur 
in  many  lines  at  a  single  time  and  may  result  in  a  general 
paralysis  of  business,  or  they  may  be  found  with  certain  prod- 
ucts or  in  certain  markets,  as  when  there  is  a  larger  supply 
of  apples  than  the  market  demands,  or  when  there  is  an  ex- 
cess supply  of  perishable  fruit  dumped  into  a  particular  mar- 
ket on  a  Saturday  afternoon.  It  is  contended,  likewise,  that 
the  system  is  so  developed  thaj^jhe_Qhy_sically  best  or  nearest 
producing  areas  are  often  kept  from  suDplymg__t^Irlogical 
markets,  because  no  adequate  means  of  contact  has  been  es- 
tablished or  because  transportation  rates  are  constructed  with 
a  view  to  bringing  distant  areas  into  more  favorable  com- 
petitive relationships.  Again,  consumers  are  so  played  upon 
by  the  competitive  efforts  of  merchandisers  that  they  are- 
held  to  have  developed  unwise  and  extragavant  demands.  It 
is  further  contended,  and  often  proved,  that  of  a  given  price 
at  a  given  time  the  producer  (and  in  particular  the  farmer) 
gets  too  small  a  share.  Or  it  is  held,  conversely,  that,  with 
the  producer  receiving  a  particular  price,  the  consumer  is 
forced  to  pay  more  than  he  should;  or,  again,  that  the  pro- 
ducer may  have  goods  to  sell  and  the  consumer  desire  to  pur- 
chase them,  but  the  market  machinery  fails  to  bring  about 
an  exchange.  Two  causes  are,  of  course,  given  for  the  large 
spread  between  producer  and  consumer:  inefficiency  of 
method,  and  the  opportunity  for  withholding  too  large  a 
margin  of  profit  by  the  various  intermediaries  involved. 

3  Chap.  XVII. 


500  PRINCIPLES  OF  MARKETING 

Either  may  be  the  result  of  the  failure  of  our  competitive 
regime  to  develop  effective  methods  and  to  keep  prices  down 
to  a  proper  margin  of  profit. 

W  ^Qther  wastes,  which  in  some  cases  can  be.  placed  at  the 
door  of  theTcompytltive  regime,  but  which,  more  often  perhaps, 
are  due  to  a  failure  to  develop  effective  and  economical  me- 
chanical equipment,  are  those  which  occur  when  it  does  not 
pay  producers  to  harvest  and  market  products;  when  products 
deteriorate  en  route  to  market  or  after  reaching  it;  and  when 
products  occasionally  are  allowed  to  perish,  even  when  they 
are  well  on  their  way  to  the  final  consumer,  because  it  does 
not  pay  those  who  hold  them  to  carry  them  further. 

It  is  evident  from  these  illustrations  that  many  of  the  criti- 
cisms now  leveled  at  the  market  organization  hit  at  the  heart 
•  of  our  competitive  regime — the  effectiveness  of  the  price  sys- 
'    tern.   \t  is  generally  held  by  apologists  for  the  existing  state 
of  affairs  that/^ecgnojnin,  progress  is  greater  under  a  regime 
of  competitionthan  it  is  conceivable  it  could  be  under  any 
i   other,  known  or  proposed^  Briefly,  the  argument  is  that  the 
I    best  men  and  the  best  processes  and  policies  evolve,  and  that 
/  the  goods  and  services  which  are  wanted,  are  produced  most 
effectively  and  most  economically.    As  applied  to  marketing 
this  means  that  the  most  pffimpn^.  firr^  wj]]  jaTvrviyp   that  the 
best  channels  of  distribution  and  the  bestjijelkeeHr  of  Bulling 
will  pre*V Hll/anil3ba^-commodities  in  the  amount,  kind,  an.d 
quality  demanded  will  be  placed  upon  the  market.    Finally, 
as  regardsTpnce  and  ~coSl,  cuiiipelittonTwill  reduce  ~pnclTto 
costs,  including  a  reasonable  (socially  necessary)  profit,  but 
still  maintain  it  at  a  point  which  will  insure  the  required  pro- 
duction.   This  ideal  comes  very  far  from  being  realized,  how- 
ever, especially  when  conditions  are  changing  so  rapidly  that 
attempted  solutions  of  problems  of  production  and  marketing 
are  often  out  of  date  by  the  time  they  are  fully  evolved. 
In  consequence,  the  process  of  selection  when  working  through 
price  is,  in  times  like  the  present,  slow  and  expensive,  for 
competition  is  slow  to  weed  out  the  inefficient  producers  and 


THE  ELEMENTS  OF  MARKETING  EFFICIENCY    501 


distributors  and  their  methods.  VT^fc^he  advocates  of  the 
existing  system,  while  recognizinertnisTnold  that  it  is  the  best 
scheme  of  production  and  distribution  which  has  been  devised, 
and  argue  that  many  of  the  proposed  remedies,  such  as  social- 
ism and  the  use  of  combinations  tending  toward  control  of 
particular  kinds  of  industry,  whether  by  manufacturers,  by 
agriculturalists,  by  middlemen,  or  by  consumers, 
jrrgnfpr^vilg  +.lifln_are  these  wastes  of  competition. 

A  large  group  of  investigators  has  long  since  taken  it  for 
granted  that  the  competitive  regime  as  we  know  it  is  in- 
adequate and  must  be  supplemented  or  abandoned.4  True, 
the  point  has  not  yet  been  reached  where  the  schemes  for  the 
complete  abandonment  of  competition  need  seriously  be  con- 
sidered as  a  practical  program.  But  there  is  a  dominant  jeel- 
ing  to-day  that,  while  we  may  depend  upon  competition  to 
maintain  and  lliurease  private  efficiency,  that  is,  the  efficiency 
ot  tne  individual  entrepreneurship.  something  more  is  jieces- 

Sary    to    bring    about__a 

activities,  particularly  between  the  efforts  of  producers  or 
consumers  of  specific  products,  and  so  to  promote  general 
efficiency.  As  an  eminent  investigator  has  said,  "Coordination 
within  an  enterprise  is  the  result  of  careful  planning  by 
experts;  coordination  among  independent  enterprises  cannot 
be  said  to  be  planned  at  all.1',5  *~ 

Importance  of  Service.  —  In  any  criticism  which  may  be 
madejthe  investigator  must  be  careful  to  balance  properlyjihe 
service  rendered,._against—  the  cost:  Too  often  the  former  is 

sure  should  sometimes  be  leveled  at  him  rather  than  at  those 
who  render  the  service  or  at  the  market  system.  That  is,  the 
consumer  should  be  censured  unless  the  very  activities  of 

4  The  reasoning  of  one  group  of  critics  is  clearly  set  forth  by  C.  R. 
Van  Hise  in  Conservation  and  Regulation  in  the  United  States  During 
the  World  War  (1917-1918);  see  also  Chas.  P.  Steinmetz,  America  and 
the  New  Epoch  (1916),  for  an  entirely  different  kind  of  -proposal. 

6W.  C.  Mitchell,  Business  Cycles,  p.  38. 


502  PRINCIPLES  OF  MARKETING 

those  who  render  the  service,  or  of  others  back  of  them,  tend 
to  increase  his  demands  for  service.  And  even  then  the  critic 
must  be  certain  that  the  service  itself  is  a  bad  thing  or  less 
desirable  than  something  which  has  to  be  foregone,  or  that 
it  is  inefficiently  performed  or  allows  undue  profits  to  be  ac- 
cumulated. 

If  there  is  a  wide  spread  in  price  between  producer  and  ulti- 
mate consumer,  if  50  per  cent  or  more  of  the  final  price  of 
an  article  is  the  marketing  cost,  this  does  not  necessarily  in- 
dicate either  inefficiency  or  excessive  profits.  On  closer  exam- 
ination it  may  be  found  that  neither  of  these  evils  is  pres- 
ent, that  the  service  is  actually  costly.  Or  it  may  be  found 
that  what  is  done  warrants  an  investigation,  not  of  the  market, 
but  of  human  desires,  or  of  modern  large  scale  methods  of 
production,  or  of  the  nature  and  effects  of  modern  railway 
rate  structures.  /  It  is  evident  that  the  relative  cost  of  market- 
ing most  commodities  has  increased  in  recent  years  and  that 
relatively  more  individuals  and  more  capital  are  engaged  in 
distribution.6  /In  so  far  as  this  is  a  result  of  modern  conditions 
in  production/and  consumption,  our  investigation  should  start 
there.  But /in  so  far  as  our. modern  distributive  system  has 
operated  to  bring  about  these  conditions  in  production  and 
consumption  we  return  whence  we  started,  and  our  field  of 
investigation  is  the  market  organization. 

The  Determining  Conditions  of  Modern  Marketing. — Any 
investigation  of  market  efficiency  should  start  with  certain 
facts  clearly  in  the  investigator's  mind.  Just  so  long  as  we 
have  large  scale  production  and  specialized  producing  units 
and  production  areas,  just  so  long  as  consumers  congregate 
in  small  areas  far  removed  from  the  source  of  the  products 
which  they  demand,  and  just  so  long  as  we  possess  wants 
which  can  be  gratified  only  with  products  from  remote  sources, 
or  products  perishable  physically  or  commercially,  just  so 
long  we  must  have  large  markets  and  a  large  and  intricate 

"Nystrom  has  gathered  some  interesting  data  on  this  point.  See  his 
Economics  of  Retailing  (2d  ed.,  1919),  pp.  338-345. 


THE  ELEMENTS  OF  MARKETING  EFFICIENCY    503 

market  organization.  And  the  larger  producers  become,  the 
more  specialized  production  and  production  areas  develop,  the 
more  consumers  congregate  and  the  more  numerous  their 
desires  become,  the  more  important,  and  probably  the  more 
costly,  the  market  machinery  will  be.  It  must  be  recognized, 
for  example,  that  the  benefits  of  specialization  in  production 
are  in  part  offset  by  the  increased  costs  of  distribution,  which 
are  necessary  to  bring  about  the  proper  coordination  between 
the  work  of  the  specialists.  And  this  refers  not  merely  to  the 
cost  of  physical  storage  and  delivery,  but  to  the  increased 
cost  of  financing,  to  the  increased  market  risks  which  must 
be  borne,  and  to  the  increased  sales  effort  which  the  larger 
producer  feels  that  he  must  make  in  order  to  minimize  these 
risks.  A  point  is  soon  reached  in  some  industries  where  the 
increased  costs  of  distribution — particularly  those  of  trans- 
portation— offset  any  advantages  of  large  scale  production. 


DIAGRAM  VIII 

Diagram  VIII  illustrates  this  point  in  a  graphic  manner. 
The  totaj  costs  of  production  and  marketing  jye  measured 
along  the  line  XO,  and  theTpassage  oi  time  during  which  large 
scale  specialized  production  is  developing  is  represented  from 
left  to  right  along  the  line  YO.  The  line 


504  PRINCIPLES  OF  MARKETING 

aa"  represents  the  decreasing  cost  of  making  a  product  for- 
merly made  in  the  home, —  (and  so  with  no  costs  of  mar- 
keting) as  clothing,  butter,  bread;  and  the  line 
aa'  in  relation  to  the  line  aa"  represents  the  increasing  cost 
of  marketing  the  product  as  large  scale  production  de- 
velops. The  line 

bb  represents  the  declining  costs  of  making  a  product — 
which,  however,  was  not  made  in  the  home — as  larger 
scale  production  is  used,  and  the  line 

b"b'  in  relation  to  the  line  bb  represents  the  increasing  costs 
of  marketing  it  as  an  increasing  scale  of  production  is 
introduced. 

It  is  conceivable  that  the  difference  between  bb'  and  bb", 
representing  increasing  costs  of  marketing,  may  become  great 
enough  to  offset  bb'",  representing  the  declining  costs  of  pro- 
duction; likewise,  that  the  amount  a'a",  representing  the 
marketing  cost,  may  become  greater  than  aa"',  representing 
declining  costs  of  production.  That  is,  the  increased  cost  of 
marketing  which  may  become  necessary  with  increasing  scales 
of  production,  may  be  greater  than  the  reductions  in  the  cost 
of  production.  In  this  case  the  total  cost  would  be  greater 
than  it  was  originally. 

It  may  be  that  society  will  some  day  discover  that  it  must 
consciously  balance  against  such  increased  costs  of  marketing 
not  only  the  advantages  of  large  scale  production,  but  the 
advantages  of  further  specialization  by  producing  areas,  and 
the  pleasure  the  consumer  derives  from  variety  and  service, 
just  as  individual  consumers  are  constantly  doing. 


CHAPTER  XXV 
THE  COST  OF  MARKETING 

The  purpose  of  the  present  chapter  is  to  discuss  some  of  the 
more  specific  criticisms  of  the  marketing  system.  One  of  the 
chief  indictments  is  that^  distribution  is  too  costly — that  too 
much  of  the  consumer's  dollar  is  absorbed  in  marketing,  or 
that  the~producer  receives  too  small  a  part  of  that  dollar.  It 
was  shown  in  the  last  chapter  that  if  this  is  true,  it  may 
be  (1)  because  the  expenses  involved  are  greater  than  the 
service  performed  by"  the  market  machinery — warTants7~l2) 
because  too  much^  service  is  rendered,  or  (3)  because  those 
who  render  the  service  obtajn^  too  large  a  profit,  over  and 
above  the  expense  they  incur.  With  a  commission  composed 
of  eminent  engineers,  headed  by  Mr.  Herbert  Hoover,  imply- 
ing that  production,  which  has  been  studied  scientifically  by 
trained  engineers  for  more  than  half  a  century,  is  often  only 
50  per  cent  efficient,1  it  would  be  surprising  indeed  if  mar- 
keting, which  has  been  studied  scientifically  for  not  over  a 
dozen  years,  and  by  a  much  smaller  group  of  men,  largely 
self-trained,  were  not  found  to  be  far  short  of  the  maximum 
of  effectiveness.  Since  the  nature  of  marketing  is  largely 
determined  by  the  conditions  of  production,  and  since  much 
of  the  present  market  machinery  was  unnecessary  until 
modern  production  methods  ^ere  developed,  it  is  but  natural 
that  the  scientific  approach  to  marketing  should  have  lagged 
behind  the  scientific  study  of  production  engineering. 

Cost   of   Marketing.2 — Business   men    and  the   public    are 

1  Waste  in  Industry    (1921),  by  the   Committee   on   Elimination   of 
Waste  in  Industry,  of  the  American  Engineering  Societies,  p.  9. 

JThe  terms  "cost"  and  "expense"  are  used  interchangeably  in  this 
chapter. 

505 


506  PRINCIPLES  OF  MARKETING 

interested  in  the  costs  of  marketing  for  the  same  reasons  that 
they  are  interested  in  the  costs  of  production.  The  actual 
)  costs  must  be  covered  by  selling  prices  if  the  product  is  to  con- 
1  tinue  to  come  on  the  market.  When  there  is  an  excessive 
spread  between  the  cost  of  production  and  the  selling  price, 
a  knowledge  of  selling  costs  makes  it  possible  to  determine 
at  what  points  profits  are  made,  and  so  serves  at  least  as  a 
starting  point  for  determining  whether  these  profits  are  ex- 
cessive.3 For  if  the  margin  between  the  cost  of  production — 
•  or  rather  the  price  which  the  producer  receives,  which  in  many 
cases  really  includes  some  marketing  costs  and  some  profits — 
and  the  final  selling  price  can  be  determined,  and  if  it  can 
be  shown  how  this  margin  is  divided  between  the  market 
functionaries,  it  clarifies  the  study  of  market  costs,  and  may 
point  to  the  weak  spots  in  the  market  machinery.  Detailed 
study  of  the  weakest  elements  and  of  the  more  expensive 
would  logically  follow. 

The  existing  information,  unfortunately,  is  to  a  large  de- 
gree unsatisfactory  for  use  in  answering  such  questions  as 
these.  It  does  serve,  however,  to  point  to  some  of  the  ex- 
penses involved,  to  show  some  of  the  conditions  under  which 
these  would  increase,  decrease,  and  vary,  and  to  throw  some 
slight  light  on  those  activities  which  hold  out  the  greatest  hope 
for  economy.  Sit  has  already  been  shown  that  to  generalize 
as  to  the  efficiency  of  the  general  market  machinery  is  im- 
possible.4 I  It  is  even  relatively  impossible  to  generalize  as  to 
the  agricultural  market,  or  the  manufacturers'  market,  and 
often,  because  of  the  many  and  varying  conditions  surround- 
ing its  sale  and  distribution,  it  is  impossible  to  generalize  as 
to  the  efficiency  with  which  any  particular  product  is  mar- 
keted. Large  and  small  producers  may  be  selling  to  large 
and  small  middlemen,  who  operate  in  large  and  small  cities, 

"Since  expenses  vary  with  individual  firms,  generalizations  on  profits 
are  very  difficult  to  make.  Insufficient  published  data  of  this  kind  are 
at  hand. 

4  Pp.  494,  501. 


THE  COST  OF  MARKETING  507 

under  differing  conditions  of  costs  and  demand.  And  prod- 
ucts vary  among  themselves  as  to  perishability,  the  nature  of 
the  transportation  and  storage  facilities  needed,  the  risk  aris- 
ing from  changes  in  market  prices,  the  volume  of  sales,  de- 
grees of  standardization,  and  seasonalness. 

The  Lack  of  Cost  Data. — Data  concerning  the  cost  of  most 
of  the  services  involved  in  the  performance  of  the  specific 
market  functions  are  not  available.5  But  there  is,  never- 
theless, sufficient  information  to  throw  light  on  a  few  points. 
The  greatest  amount  of  cost  data  is  available  in  studies  which 
have  been  made  of  the  marketing  of  agricultural  products,  and 
of  retail  distribution.  There  are  few  figures  in  the  manufac- 
turing field  which  can  be  used,  particulajjy  concerning  the 
marketing  costs  of  the  manufacturer  himself;  and  where  such 
studies  have  been  made  they  are  either  not  generally  available 
for  publication  or  else  they  are  unsatisfactory.6  Because  of 
the  paucity  of  data  on  actual  expenses,  the  only  attempt  made 
here  will  be  to  show  the  margins  on  which  some  of  the  mid- 
dlemen of  certain  classes  have  been  shown  to  operate.  Since 
the  greatest  interest  centers  in  goods  for  personal  consumption, 
and  since  more  information  is  available  concerning  their  dis- 
tribution, the  present  discussion  will  be  confined  mainly  to 
them. 

Throughout  previous  discussions  goods  have  sometimes  been 
classified  on  one  basis  and  sometimes  on  another.  Commodi- 
ties have  been  divided  into  consumption  goods,  equipment, 
and  production  goods.  The  latter  have  been  divided  into  raw 

r-   f   — •  ,         "*'H 

materials,  semi-manufactured  goods,  fully  manufactured  goods 
to  be  assembled,  and  supplies.  At  other  times  distinction 

5  Specific  rates  for  railway  transportation,  warehouse  rates,  bank  dis- 
counts, etc.,  are  available.    But  middlemen  and  producers  perform  these 
functions  to  a  large  extent,  and  few  figures  are  available  concerning  their 
costs. 

6  Some  valuable  information  has  been  collected  recently  by  the  Fed- 
eral  Trade   Commission,   and  its  work  continues  to  develop.     In  the 
field  of  retail  distribution  valuable  contributions  are  being  made  by  the 
bureaus  of  business  research  of  Harvard  and  Northwestern  Universities. 


508  PRINCIPLES  OF  MARKETING 

has  been  made  between  farm  products  and  manufactured 
goods.  And,  finally,  a  rough  distinction  has  been  made  be- 
tween staples — goods  which  are  "bought" — and  specialties- 
goods  which  are  "sold."  In  the  discussion  which  follows  each 
of  these  classifications  will  be  used.7 


Cost  of  Marketing  Farm  Products,8 — In  the  sale  of  farm 
products  the  process  of  concentration  is  of  greater  importance 
than  it  is  in  the  sale  of  most  other  raw  materials  or  of  manu- 
factured goods.9  And  it  is  in  the  marketing  o£  farm  prod- 
ucts, destined  for  sale  in  the  original  state  to  .final  con- 
sumers, that  the  process  of  concentration  followed  by  dis- 
persion is  found  most  fully  developed.  With  farm  products 
the  channel  of  distribution  sometimes  has  many  and  some- 
times few  steps.  TJ,ie  typical  case  for  consumption  goods  is 
one  in  which  four  middlemen  appear:  country  shipper,  whole- 
sale receiver,  jobber,  and  retailer.  The  evidence  at  hand  in- 
dicates that  of  these  four  steps  the  one  attended  with  least 
expense  is  the  wholesale  handling;  by  the  receiver.10  Concen- 
trating in  the  country  and  jobbing  in  the  city  cost  a  little 
more,  and  retailing  is  the  most  expensive  part  of  the  whole 
process. 

A  study  of  a  number  of  investigations  into  the  cost  of  re- 
tailing warrants  the  generalization — for  the  present  purpose 
— that  retail  margins  run  close  to  one-third  of  the  final  price 

7  The  last  two  distinctions  will  be  developed  in  greater  detail.    This 
is  partly  because  some  of  the  points  which  could  be  made  concerning 
the  first  classification  were  touched  upon  in  Chap.  XXI. 

8  See  L.  D.  H.  Weld,  The  Marketing  of  Farm  Products,  Chaps.  IX 
and  X,  on  the  cost  of  marketing  farm  products. 

9  See  pp.  39-42,  and  115-117. 

10  See  Table  VIII,  which  is  used  only  for  illustrative  purposes. 


THE  COST  OF  MARKETING 


509 


TABLE  VIII.     Typical  Dealers'  Margins  on  Produce  Commodities* 


Shipper 
(per  cent) 

Receiver 
(per  cent) 

Jobber 
(per  cent) 

Retailer 
(per  cent) 

Butter 

5-10 

1-5 

4-7 

10-15 

Poultry     .           

5-10 

1.1 
5.6 
25-5 

4.8 
5-15 

13.9 
11.7 
10-25 

Eggs  . 

5-20 

11.9 
1-5 

3-10 

20 
10-20 

Cheese 

4.3 

48    * 

12.7 
102 

14.7 
219 

Potatoes  

10-20 

1-5 

5-15 

15-25 

Strawberries       

14.3 
5-10 

4.3 
5-7 

8.8 
5-15 

26.0 
10-30 

Oranges   

26 

123 

333 

*  "That  is,  the  percentage  which  the  dealer's  charge  or  increment  is  to  the 
price  which  he -gets  for  the  goods,  not  percentage  of  the  consumer's  price. 
The  writer  believes  that  this  method  is  better  for  our  purposes,  as  showing 
the  ratio  of  the  marketing  expense  to  the  value  of  the  goods  handled.  The 
message  of  the  figures  is  not,  however,  entirely  clear,  owing  to  the  fact  that 
in  several  cases  the  margin  represents  the  total  'mark-up'  and  does  not  dif- 
ferentiate waste  from  actual  costs  of  marketing."  The  table  and  the  explana- 
tion are  taken  from  E.  G.  Nourse,  The  Chicago  Produce  Market  (1917),  p.  122. 

which  the  consumer  pays  for  his  goods.11  It  seems  reason- 
able to  believe  that  the  cost  of  retailing  farm  produce,  espe- 
cially perishables,  is  at  least  as  high  as  this.  However,  fig- 
ures in  Table  VIII  are  lower  than  this,  as  are  figures  cited 
by  Weld.12  But  even  if  these  lower  figures  are  accepted  as 
typical,  they  are,  nevertheless,  so  high  as  to  warrant  the  gen- 
eralization that  retailing  is  the  most  expensive  step. 

Further  Expenses  of  Marketing  Farm  Products. — Other 
important  costs  in  marketing  agricultural  products  are  the 
physical  distribution  of  the  product — hauling  and  other  trans- 
portation, storage,  and,  in  the  case  of  perishables,  refrig- 
eration, pre-cooling,  and  cold  storage — and  the  waste  which 
results  from  ineffective  market  news. 

Despite  rapid  transportation,  refrigeration,  and  costly  sys- 
tems of  obtaining  market  information,  a  great  many  perish- 
ables spoil  through  failure  to  reach  the  right  market  in  time. 

"Some  of  the  figures  in  staple  (and  so  low-cost  lines)  are  given  on 
p.  515. 

UL.  D.  H.  Weld,  op.  tit.,  Chap.  IX. 


510  PRINCIPLES  OF  MARKETING 

And  whether  highly  perishable  or  not,  farm  products  have 
even  been  allowed  to  spoil  because  it  did  not  pay  the  grow- 
ers to  market  them  or  the  dealers  to  sell  them  in  the  market 
they  were  in,  or — because  of  low  prices  or  perishability — to 
send  them  to  other  markets  where  prices  were  better.  The 
cause  of  variations  in  price  between  markets  which  bring 
about  losses  of  this  kind  is,  unless  the  goods  are  extremely 
perishable,  the  inadequacy  of  the  market  news  service,  'foo 
many  shippers  have  sent  their  goods  to  a  given  market^  and 
so  there  are  more  goods  in  that  market  than  it  will  absorb 
at  a  profitable  price.  Lack  of  information  may  also  cause 
under-  or  overproduction  of  commodities. 

'  Other  weaknesses  in  marketing  agricultural  products  have 
been  mentioned  from  time  to  time  in  previous  chapters.13 
These  problems  start  at  the  farm  with  the  failure  of  the 
grower  to  raise  the  products  for  which  he  is  likely  to  find 
the  best  market;  his  failure  properly  to  sort,  grade,  and 
pack  his  product,  and  his  general  lack  of  market  knowledge.14 
Some  of  these  same  difficulties  are  found  at  country  shipping 
points  where  there  may  also  be  inefficient  shippers,  too  many 
or  too  few  shippers,  or  monopoly  conditions.  One  very  great 
item  in  marketing  most  agricultural  products  is  the  cost  of 
hauling  on  country  roads.  The  obvious  remedy  for  this  is  to 
improve  the  methods  of  transportation,  and  this  is  being 
rapidly  accomplished  through  better  roads  and  by  the  use  of 
the  motor  truck. 

It  has  been  pointed  out  that  there  are  opportunities  for 
fraud  and  unfair  competition,15  that  wholesale  districts  are 
often  congested  and  physically  inefficient,  and  that  customs, 
grades,  methods,  packages,  vary  as  between  markets,  making 

13  See  also  Weld,  op.  cit.,  Chap.  XXI;  "Reducing  the  Cost  of  Distri- 
bution," Annals  of  the  American  Academy,  Vol.  L,  No.  139  (Nov., 
1913);  Nourse,  The  Chicago  Produce  Market;  and  the  Report  of  the 
Federal  Trade  Commission  on  the  Wholesale  Marketing  of  Food  (1920). 

"See  pp.  36-37. 

15  See  Nourse,  op.  cit.,  pp.  59-30 


THE  COST  OF  MARKETING  511 

standardization  difficult.16  All  of  these  latter  evils  are  more 
or  less  specific,  applying  to  certain  products  or  to  some  prod- 
ucts in  a  few  markets. 

Total  Costs. — The  cost  of  agricultural  marketing  has  been 
estimated  as  ranging  from  15  to  65  per  cent  of  the  price  paid 
by  the  consumer.17  The  higher  costs  prevail  in  the  case  of 
perishables.  Thus  the  cost  of  transportation  alone  of  Cali- 
fornia fruit  amounts  to_20  per  cent  of  the  final  retail  price, 
whereas  for  most  products,  the  United  States  Department 
of  Agriculture  has  estimated  that  but  7  per  cent  goes  for 
transportation  costs.  The  cost  of  wholesaling  farm  products 
is  relatively  low,  varying  from  5  foJ.0  per  cent  for  such  staples 
as  corn,  wheat,  and  cotton,  and  ranging  somewhat  higher 
in  the  case  of  perishables.  Is  is  obvious  that  no  safe  conclu- 
sions of  a  general  nature  can  be  drawn  either  concerning  the 
average  cost  of  marketing,  or  regarding  the  average  effi- 
ciency of  marketing.  Perishability,  waste,  and  shrinkage, 
varying  quantities  that  are  shipped  and  handled,  effective- 
ness of  market  information,  extent  of  competition,  season- 
alness,  the  extent  to  which  grading  and  inspection  make  sale 
by  description  or  sample  possible  and  so  eliminate  the  cost 
of  bulk  inspection  and  sale — these  are  all  important  fac- 
tors in  determining  the  efficiency  and  the  cost  of  marketing, 
and  they  vary  greatly  in  their  effects  as  between  different  prod- 
ucts, different  markets,  and  different  seasons  of  the  year.18 

II 

Marketing  Manufactured  Products :  Staple  Lines. — It  has 
been  shown  that  the  cost  of  selling  manufactured  goods  which 
are  in  the  nature  of  special  equipment  or  consumption  goods 
is  very  high.  In  their  physical  distribution,  it  is  largely 

18  One  of  the  best  recent  criticisms  is  found  in  th^ Report  of  the  Fed- 
eral Trade  Commission  on  the  Wholesale  Marketing. of  Food  (1920). 

17  See  footnote  13,  p.  276. 

18  An  excellent  discussion  of  the  difficulties  involved  in  studying  costs 
of  marketing  will  be  found  in  Nourse,  op.  cit.,  pp.  118-128. 


512  PRINCIPLES  OF  MARKETING 

true  that  farm  products,  since  they  are  more  perishable  and 
usually  more  seasonal,  are  more  difficult  to  market.  But 
these  problems  are  understood  and  their  solution  by  mechani- 
cal means  is  well  on  its  way.  In  the  field  of  selling  there 
are  distinct  general  differences  between  agricultural  prod- 
ucts, particularly  the  staples,  and  manufactured  goods  for 
personal  consumption.19  For  example,  estimates  taken  from 
government  reports  on  certain  staple  industries  indicate  that 
(1)  in  the  hosiery  business,  the  cost  to  the  manufacturer  of 
selling  to  the  retailer  varied  from  1  per  cent  to  29  per  cent 
of  the  manufacturers'  selling  prices,  with  an  average  of  8.31 
per  cent;20  (2)  for  knit  underwear  it  was  2  per  cent  to  25 
per  cent,  averaging  6.87  per  cent;  (3)  for  shirts  and  collars, 
2  per  cent  to  18  per  cent,  averaging  5.88  per  cent.  To  such 
costs,  must  be  added  the  costs  of  retailing  which  can  be  safely 
set  at  25  per  cent,21  or  more  of  the  final  price  paid  by  the 
consumer.  The  total  cost  of  selling  the  products  of  the 
International  Harvester  Company  was  estimated  by  the  Com- 
missioner of  Corporations  at  17  per  cent  of  its  sales,  and 
to  this,  for  purposes  of  comparison,  must  logically  be  added 
interest  on  the  money  invested  in  the  sales  efforts  (which, 
however,  there  is  no  'way  to  estimate)  and  the  costs  of 
retail  distribution.  Of  the  price  paid  by  the  consumer 
for  a  pound  of  beef  in  1920,  63.6  per  cent  was  paid  to  the 
producer,  9  per  cent  was  the  packer's  margin,  and  27.4  per 
cent  the  retailer's  margin.22  Thus,  it  seems  that  in  the  case 
of  these  staple  products,  there  is  a  selling  cost  of  from  30 

"The  true  distinction  here  is  between  consumption  goods  and  pro- 
duction goods,  but  manufactured  goods  for  consumption  serve  as  a 
good  illustration  of  consumption  goods. 

20  U.  S.  Bureau  of  Foreign  and  Domestic  Commerce,  Reports  in  the 
"Miscellaneous   Series,"   on   the  hosiery   industry,   knit   underwear   in- 
dustry, collar  industry,  etc. 

21  It  should  be  said  that  this  retail  cost  is  really  a  joint  cost  that 
cannot  be  readily  differentiated  for  specific  products  handled  in  particu- 
lar retail  stores. 

22  Swift  and  Company,  Year  Book,  1920,  pp.  44-47. 


THE  COST  OF  MARKETING  513 

per  cent  to  55  per  cent  of  the  final  selling  price,  if  we  include 
the  general  estimate  of  25  to  33  per  cent  for  retail  selling  costs. 

Cost  of  Marketing  Specialties. — Fewer  facts  are  available 
concerning  the  cost  of  marketing  manufactured  specialties  but 
even  generalizations  which  are  fairly  accurate  serve  the  im- 
mediate purpose.  It  is  believed  that  the  cost  of  marketing 
such  manufactures  ordinarily  is  equal  to  the  production  costs, 
if  it  is  not,  indeed,  far  greater.  That  is,  over  one-half  the 
price  paid  by  the  consumer  goes  to  pay  for  the  cost  of  selling 
the  product.  These  costs  are  largely  for  demand  creation; 
that  is,  for  the  creation  of  demand  for  new  products  that 
consumers  are  not  in  tnThabit  of  buying.  But  much  of  the 
cost  is  a  competitive  cost  for  diverting  competitors'  custom 
or  for  sustaining  the  manufacturer's  custom  from  the  di- 
verting activities  of  his  competitors.  In  some  cases  a  retailing 
cost  is  incurred  by  the  manufacturer.  For  instance,  many 
specialties,  such  as  typewriters,23  adding  machines,  and 
cash  registers,  are  sold  by  manufacturers  directly  to  con- 
sumers. This  means  that  the  cost  which  would  correspond 
to  the  retail  cost  of  selling  must  be  very  great,  because  the 
selling  overhead  must  be  apportioned  upon  a  relatively  small 
number  of  products  in  a  single  line.24 

In  the  sale  of  an  article  which  consumers  are  not  in  the 
habit  of  buying,  a  demand  must,  in  the  first  instance,  be 
created — usually  by  the  manufacturer.  That  is,  the  con- 
sumer must  be  sold;  he  does  not  go  shopping  for  such  goods 
of  his  own  free  will  as  he  does  for  staple  goods.  The  com- 
petitive cost  of  marketing  specialties  is  thus  greater  than 
that  for  marketing  staple  necessities  for  which  the  demand 
is  relatively  inelastic.  This  is  because  there  is,  in  addition  to 
the  problem  of  competing  with  sellers  of  the  same  kind  of 
product,  the  further  problem  of  competing  with  sellers  of 

23  It    is    claimed    that    marketing    expense    accounts    for    four-fifths 
of  the  price  of  some  typewriters. 

24  For  an  understanding  of  this,  the  reader  is  referred  to  the  discussion 
of  manufacturers'  middlemen  and  their  services,  in  Chaps.  VIII  and  IX. 


514  PRINCIPLES  OF  MARKETING 

other  products,  which  may  be  used  as  substitutes.  There 
is,  too,  the  additional  problem  of  competing  with  vendors 
of  products  whi?h  are  not  similar,  but  which  are,  never- 
theless, competing  for  that  part  of  the  consumer's  purchasing 
power  which  is  available  over  and  above  his  needs  for  the 
necessities  and  conveniences  that  have  become  staple. 


in 

The  Cost  of  Retailing.25 — The  most  expensive  unit  in  the 
distribution  of  goods  for  personal  consumption  is  the  retail 
store.  The  average  cost  of  retailing  staple  commodities  ranges 
from  20  per  cent  to  50  per  cent  of  the  price  paid  by  the  con- 
sumer, and  a  very  common  cost  is  30  to  35  per  cent.26  Figures 
of  this  kind  prove  nothing  of  themselves  concerning  the  ef- 
fectiveness of  retailing.  They  do  show,  however,  that  we 
pay  heavily  for  the  retailer's  service.  Furthermore,  the  range 
in  expenses  of  stores  of  substantially  the  same  character  is  so 
great  as  to  warrant  the  belief  that  a  large  percentage  of  our 
retail  stores  are  operated  at  an^  excessive  cost.  Again,  if 
the  rate  of  stock-turn  is  accepted  as  an  important  measure 
of  retail  efficiency,  the  same  conclusion  must  be  drawn.  This 
conclusion  is  borne  out  by  the  figures  cited  in  Tables  IX, 
X,  and  XL 

25  For  a   number   of  wholesale  margins  see  Tables  V   and  VI,   pp. 
150,  152;  518,  and  the  Report  of  the  Federal   Trade  Commission  on 
the  Leather  and  Shoe  Industries  (1919),  Chaps.  V  and  VI. 

26  The  National  Retail  Dry  Goods  Association,  in  a  table  accompany- 
ing their  "Resolutions  Against  'American  Valuation'"  (Oct.  14,  1921), 
use  33Va  per  cent  as  the  ''approximate"  retail  mark-up.    This  figure  is 
commonly  used.    See  also  P.  T.  Cherington,  Advertising  as  a  Business 
Force,  pp.  209-210,  382-383,  386-390.    Many  of  the  figures  concerning 
retail  margins  are  difficult  to  interpret,  because  it  is  not  evident  whether 
the  margin  mentioned  is  the  maintained  gross  profit,  or  whether  it  is 
simply  a  mark-up,  subject  to  reductions  for  sales,  and  other  causes. 


THE  COST  OF  MARKETING 

TABLE  IX.    Retail  Margins  t 


515 


Type  of  Store 

Lowest 

Highest 

Common, 
"Attain- 
able," * 
or 
Average 

Retail  grocery  stores  * 

% 
146 

% 
279 

% 
21  0 

Retail  grocery  stores  2 

105 

2604 

16  9 

Retail  grocery  stores  §  

153 

Total  net  sales 
Under  $20,000  per  annum  

183 

$20,000,  under  $50,000  

142 

$50,000,  under  $100,000  

140 

$100  000  and  over  

162 

Retail  shoe  stores  3  .  . 

180  || 

350|| 

20  H-25  || 

Retail     shoe     stores  —  selling     low-priced 
shoes,   i.e.,  up  to  $3.00   for  men   and 
$3.50  for  women,  on  the  pre-war  basis  4. 
Retail  shoe  stores  —  selling  medium-priced 
shoes,  i.e.,  from  $3.00  to  $6.00  for  men 
and  $3.50  to  $7.00  for  women,  on  the 
pre-war  basis  4  

18.3 
14.23 

40.4 

42.8 

25.7 
26.6 

Retail     shoe     stores  —  selling     high-priced 
shoes  *  

21.3 

41.5 

34.8 

Shoe  departments  of  department  stores4.. 
Chain  shoe   stores  4  

12.6 
12.5 

39.1 
45.5 

28.1 

28.4 

Retail  hardware  stores  5  

12.75 

40.2 

26.5 

Retail  clothing  stores  6 
Total  net  sales 
Under  $40,000  

Under  10  1| 

50-60  || 

10-25  || 

$40,000-$80,000   

Under  10|| 

30-40  || 

15-20  || 

$80,000-$180,000    

Under  10  1| 

40-50  || 

15-20  || 

$180,000  and  over  

10-15(1 

40-50  || 

20-25  || 

Cooperative  stores  7  

10.5 

24.4 

17.7 

%  Gross  profit  unless  otherwise  shown. 

*  This  is  not  an  average  but  the  figure  about  which  the  expenses  of  enough 
stores  center  to  warrant  considering  it  as  an  attainable  figure  for  all  stores  of 
the  class. 

I  Harvard  Bureau  of  Business  Research,  Bui.  No.  5   (1915). 
*Ibid.,  Bui.  No.  13   (1920). 

3 Ibid.,  Bui.   No.  1    (1913). 
4 Ibid.,  Bui.  No.   10   (1918). 

6  Ibid.,  Bui.  No.  12   (1919). 

8  Northwestern  University  Bureau  of  Business  Research,  The  Surrey  of  the 
Retail  Clothing  Industry,  Vol.  Ill  (1919),  p.  262. 

7  Bexell,  Macpherson  and  Kerr,  A   Survey  of  Typical  Cooperative  Stores  in 
the   United  States    (U.   S.   Department  of  Agriculture,   Bui.   No.   394,   Nov.   3, 
1916),  p.  24. 

§  Theodore  Macklin  and  P.  E.  McNall,  What  the  ketailer  Does  .with  the 
Consumer's  Dollar.  University  of  Wisconsin,  Agricultural  Expt.  Sta.,  Bui. 
No.  324  (Jan.,  1921). 

II  Total  expense. 

U  That  is,  20  per  cen-t  for  stores  selling  "low  grade"  shoes  and  25  per  cent 
for  stores  selling  "high  grade"  shoes. 


516 


PRINCIPLES  OF  MARKETING 


TABLE  X.    Annual  Rates  of  Stock-Turn 


Type  of  Store 


Lowest 


Highest 


Most 
Common 


Retail  grocery * 1.8 

General    merchandise  * 0.86 

Retail  hardware2 0.85 

Retail  shoe  stores 3 

Selling  low-priced  shoes — up  to 
$3.00  for  men,  $3.50  for 

women   0.6 

Selling  medium-price  shoes — 
from  $3.00  to  $6.00  for  men, 
from  $3.50  to  $7.00  for 

women  0.7 

Selling  high-price  shoes — $6.00 
and  over  for  men,  $7.00  and 

over  for  women 0.92 

Shoe  departments  of  depart- 
ment stores 0.89 

Chain  shoe  stores 1.1 

Retail  clothing  stores  * 
Total  net  sales 

Under  $40,000   0.6 

$40,000  to  $80,000 0.8 

$80,000  to  $180,000 0.8 

$180,000  and  over 1.2 

Total  (all  stores) . .  0.6 


27.07 
13.1 
5.75 


4.77 


5.1 


2.33 

3.1 
4.6 


5.0 
5.1 
6.3 
6.1 
5.0. 


7.9 
2.4 

1.8 


1.6 


1.7 


1.5 

1.5 
1.7 


1.0-1.5 
1.5-2.0 
1.5-2.0 
2.0-3.0 
1.5-2.0 


1  Harvard  Bureau  of  Business  Research,  Bui.  No.  13  (1919). 

2  Ibid.,  Bui.  No.   12   (1919). 
zIUd.,  Bui.  No.  10  (1918). 

*  Northwestern  University  Bureau  of  Business  Research,  The  Survey  of  the 
Clothing  Industry,  Vol.  V,  p.  470.  (The  low  and  high  figures  are  not  yet 
published.)  The  figures  are  for  1919. 

TABLE  XI.    Stock-Turn  in  Department  Stores  * 


Department 


Lowest 


Highest 


Median 


Books  

Boys'  clothing  . . . 
"      furnishings  . 

Furniture   

Men's  clothing   .. 
furnishings 

Millinery    , 

Women's  suits  . . . 
dresses    . 

Shoes,  Men's 

Women's  . , 
Silks  and  velvets. 

Stationery 

Waists    . 


2.53 
1.82 
3.60 
1.14 
2.40 
2.20 
4.21 
5.70 
5.14 
1.93 
2.52 
2.60 
2.00 
3.70 


3.79 

8.40 

5.21 

6.10 

7.70 

5.43 

14.40 

18.30 

16.90 

4.60 

4.50 

4.80 

3.40 

8.40 


2.60 
3.52 

340 
4.42 
3.30 
8.70 
9.15 
9.10 
2.70 
3.13 
2.80 
2.89 
7.70 


1  Figures  are  for  departments  of  stores  doing  an  annual  volume  of  business 
of  $7,500,000  and  upwards,  five  stores  reporting.  Taken  from  a  chart  com- 
piled by  the  Bureau  of  Research  and  Information  of  the  National  Retail  Dry 
Goods  Association  (1919). 


THE  COST  OF  MARKETING  517 

IV 

Costs  of  Marketing  Production  Goods. — Production  goods 
seem  to  be  marketed  with  relative  efficiency.27  One  of  the 
great  costs  found  in  marketing  consumption  goods  and  special 
equipment,  namely,  demand  creation  an^  the  cojBpeiitiiser 
selling  costs  which  so  often  accompany  it,  is  almost  absent 
sm-tfie*"sale  of  production  goods.  This  is  true  because  they, 
as  well  as  standard  equipment,  have  characteristics  which 
are  commonly  well  known  to  buyers  and  sellers,  and  which 
are  easily  determined  through  the  use  of  established  methods 
of  grading  and  inspection.28  It  is  also  due  in  part  to  the 
fact  that  in  their  exchange  both  parties  to  a  sale  are  effi- 
cient traders  and  are  able  to  judge  well  the  value  of  the 
merchandise.  The  size  of  individual  transactions,  more- 
over, usually  warrants  the  expenditure  of  considerable  time 
in  determining  qualities  and  characteristics  and  in  arrang- 
ing the  conditions  of  sale.  Superior  products  are,  conse- 
quently, sold  for  higher  prices  than  inferior  products,  and  the 
exchange  is  transacted  rapidly  and  efficiently.  Stress  is  laid 
on  the  elimination  of  waste  and  of  undue  costs:  that  is  the 
type  of  "service"  which  is  demanded.  There  is  little  need 
or  opportunity  to  stress  the  fact  that  Brown's  bushel  of  wheat 
or  Brown's  steel  bar  is  better  than  Smith's,  for,  if  Brown^s_ 
product  is  superior,  the  conditions  are  present  which  assure 
that  it  will  be  sold  for  more  than  Smith's. 

Conclusions. — The  data  shown  in  this  chapter  are  used  only 
to  point  to  a  few  broad  generalizations  of  importance  to  any 
criticism  of  the  cost  of  marketing.  They  have  been  cited 
simply  to  show  certain  typical  tendencies.  Since  these — and 
other  data  like  them  which  could  be  advanced — were  gathered 
under  diverse  conditions,  for  differing  purposes,  and  with 

wln  recent  months,  however,  some  farm  organizations  have  held  that 
immense  loss  comes  to  producers  because  of  the  lack  of  "orderly  mar- 
keting" on  the  part  of  producers.  See  pp.  257-258. 

28  See  Chap.  XXI. 


518 


PRINCIPLES  OF  MARKETING 


varying  degrees  of  accuracy,  conclusions  of  too  specific  a  na- 
ture would  be  unwarranted. 

The  data  serve,  however,  to  illustrate,  first  of  all,  that  the 
retail  mp-^jn  i«  +.hp.  ]^.rprpgt.ma.rprin  taken  out  by  an 
middlemen.  In  fact,  thismargin  is  oiten  as  great  as  all  of 
the  other  marketing  expenses  together,  or  even  greater.  The 
jobber's  margin  is  commonly  in  the  neighborhood  of  one-quar- 
ter to  one-half  of  the  retail  margin,  seldom  more  and  often 

TABLE  XII.    Wholesale  Margins  § 


Type  of  Store 

Lowest 

Highest 

Common 

Wholesale  grocery  *     

% 
6.08 

% 
14.9 

% 
11  0 

Wholesale  grocery  t  

7.7 

172 

120 

§  Gross  profits. 

*  Figures  for   1918.      Harvard   Bureau   of   Business  Research,   Bui.   No.    14 
(1919). 

t  Figures  for  1916,  Ibid.,  Bui.  No.  9   (1917). 

TABLE  XIII.    Stock-Turns  of  Wholesale  Dealers 


Lowest 

Highest 

Common 

1Wholesale  grocery  1 

28 

11  6 

57 

\Vholesa,le  grocery  a 

248 

1903 

52 

1  Harvard  University  Bureau  of  Business  Research,  Bui.  No.  9   (1917). 

2  IUd.,  Bui.  No.  14   (1919). 

less,  ^(n  the  second  place^therejs  a  considerable  y^jjation  in 
retail  margins  and  in  the  rate  of  stock^tu^Fffl  ine  same  kind 
of  stores.  'I'hese  tacts  are  shown  in  'fables  IX  and  X.  These 
variations  are  so  great  that  they  cannot  be  accounted  for  on 
the  ground  that  the  fundamental  conditions  are  different. 
They  point  undoubtedly  to  variations  in  the  efficiency  with 
which  retailing  is  carried  on.  Table  XII  and  Tables 
V  and  VI 29  show  that  the  same  thing  is  true  of  wholesale 
expense,  but  since  the  margins  are  smaller  the  variations  are 
less.  Furthermore,  jobbing  must  be  conducted  very  largely 
28  Pp.  150-152. 


THE  COST  OF  MARKETING 


519 


on  a  price  basis,  and  less  on  a  service  basis  thanjs  retailing. 
This  forces  jobbers  t'o  reduce  their^expenses  and  tends TcTkeep 
the  expenses  of  all  competing  jobbers  at  about  the  same  figure. 
Finally,  these  figures  illustrate,  also,  tlrf-high  cost  of  selling 
consumption  goods. 


CHAPTER  XXVI 
FINAL  CRITICISM 


The  Wastes  of  Competitive  Selling. — Thes^wo  fundamental 
methods  of  selling  are  personal  salesmanship  and  advertising. 
Of  these,  advertising  is  more  usually  singled  out  for  adverse 
criticism,  on  the  ground  that  it  is  a  wasteful,  extravagant 
means  of  competition.  This  is  unfortunate,  for  much  of  this 
criticism,  although  it  is  directed  at  advertising,  is  really  criti- 
cism of  certain  marketing  polices  of  which  advertising  is  sim- 
ply one  expression.  Advertising  is  employed  instead  of,  or  to 
accompany  the  use  of,  personal  salesmanship,  the  use  of  sam- 
ples, or  the  display  of  goods,  simply  because  it  is  thought 
to  be  cheaper  or  more  effective.  In  fact  there  is  little  ques- 
tion but  that  in  the  selling  of  merchandise  a  far  greater 
sum  is  spent  on  salesmen  than  on  advertising.  Few  manu- 
facturers spend  as  much  on  advertising  as  they  do  on  sales- 
men. This  is  especially  true  in  the  sale  of  production  goods 
and  equipment.  In  wholesaling  and  particularly  in  retail- 
ing, the  salesforce"'  expense  is  usually  the  largest  operating 
expense,  and  is  far  greater  than  the  advertising  cost.1 

Criticism  of  advertising,  specifically,  rather  than  of  selling 
costs,  tends  to  give  the  impression  that  advertising  is  a  costly 
method  of  selling,  and  even  that  it  is  responsible  for  costly 
selling.  The  reverse  is  usually  true.  For  although  the  use 
of  salesmen  is  commonly  considered  the  more  effective  method 

1  See  A.  W.  Shaw  Co.,  How  to  Run  a  Wholesale  Business  at  a  Profit 
(1918),  pp.  xix-xxv,  Harvard  Bureau  of  Business  Research,  Buls.  10,  12., 
13,  14;  and  Northwestern  University,  Bureau  of  Business  Research,  The 
Survey  of  the  Retail  Clothing  Industry  (1921). 

520 


FINAL  CRITICISM  521 

1  / 


of  selling  —  (Vet  ignored  —  it  is  often  100  pvpensjyft,  This  is 
\»  especially  true  when  individual  fales  are  made  in  small  volume 
and  with  a  small  margin  of  profit  over  prcduction  costs.  Ad- 
vertising, consequently,  is  used,  not  merely  because  it.  creates 
demand,  but  because,  when  substituted  for  other  methods,  it 
creates  demand  at  a  lower  unit  cost,  or  because,  when  it  supple- 
ments the  efforts  of  salesmen,  sales  costs  decline.  It  is  generally 
agreed  that  advertising  in  many  instances  has  Kwered  selling 
\  costs  as  well  as  manufacturing  costs.  This  is  because  it 
TAfltea  n  Jars**  demand  at  a  minimum  ^ost  and  bringR  ab"11*- 
the  stjmdardiz3tion  of  merchandise,  thereby  rendering  large 
scale,  standardized  production  possible.  It  has  also  assisted 
\in  lowering  costs  of  production  by  smoothing  the  peiks  of 
demand  for  seasonal  goods  into  a  more  steady  deman-  ind 
has  thereby  rendered  continuous  production  possible. 

It  has  been  contended  by  some  critics  that  as  far  as  the  con- 
sumer's immediate  interest  is-^concerned,  socially  legitimate 
sales  effort  should  be  devoted  to  the  announcement  of  new  arti- 
cles or  new  uses  for  old  articles.2  The  purpose  to  be  serve4-by 
an  article  should  be  explained  and  the  way  in  which  it  served 
this  need  should  be  pointed  out.3  Improvements  on  existing 
articles  and  special  prices  could  also  be  announced.  But  it 
may  be  questioned  whether  the  consumer's  long  time  interests 
would  be  served  if  selling  were  so  confined.  The  inventors  of 
many  products  which  it  is  agreed  have  proved  a  boon  to  hu- 
manity have  died  poor.  People  would  not  use  their  product. 
It  was  only  when  they  or  some  business  man  successfully  sold 
the  article  that  it  was  finally  adopted.  The  problems  which 
faced  Watt,  Corliss,  Morse,  Edison,  the  Wright  brothers,  and 
scores  of  others  —  because  of  the  failure  of  the  consuming  public 
to  take  up  their  product  —  are  familiar  to  all.4  Most  of  the 
comforts  enjoyed  to-day  have  been  made  commercially  possible 
only^T5y~sa!es^  efforts.  Nevertheless  the  process  is  expensive. 

3  See,  however,  pp.  12-16. 

3E.  P.  Harris,  Cooperation:  the  Hope  of  the  Consumer,  Chap.  I. 

4  See  also  F.  W.  Taussig,  Inventors  and  Money-Makers  (1915). 


522  PRINCIPLES  OF  MARKETING 

For  not  only  are  the  facts  concerning  goods  tnnounced  to 
us,  but  they  are  annoinced  over  and  over  and  over  again  in 
every  conceivable  w.iy.  The  consumer  is  not  left  to  judge  for 
himself  but  every  effort  is  made  to  influence  his  judgment. 
Furthermore,  mer?  announcement  is  not  sufficient  to  satisfy 
competitive  needs.  Most  products  offered  for  sale  are  very 
much  like  competing  products  serving  the  same  ends.  But 
if  announcements  were  of  the  kind  suggested,  individual  pro- 
ducers might  not  get  so  large  a  share  of  prospective  trade  as 
they  feel  they  would  get  if  they  could  make  the  consumer 
think  that  their  product  is  really  very  different  from  all  com- 
peting articles  and  far  superior  to  them.  Consequently,  some 
different  "selling  point"  or  points  must  be  found  to  differ- 
entiate the  product  from  its  fellows — to  individualize  it.  Then, 
by  making  the  sales  effort  focus  on  this  particular  article,  and 
its  "different"  characteristics,  the  seller  tries  to  make  prospec- 
tive customers  think  they  will  make  a  great  mistake  if  they 
do  not  get  it  in  preference  to  others.  Now  this  'may  often  be 
true,  but  in  the  great  majority  of  cases  it  will  be  found  that 
many  of  these  "selling  points"  are  not  particularly  important 
characteristics  of  the  articles  sold. 

Importance  of  Demand  Creation  Reviewed. — This  last 
point  now  requires  attention.  The  problem  of  demand  crea- 
tion is  important  to  manufacturers  of  consumption  goods.5 
Inasmuch  as  most  goods  of  this  class  are  not  absolute  neces- 
sities, but  are  necessities  modified  for  selling  purposes  or  else 
goods  which  cater  to  the  desire  for  conveniences  and  luxuries, 
and  since  there  are  many  more  of  such  products  on  the  market 
than  the  average  consumer  can  afford  to  buy,  it  becomes  a 
particularly  difficult  task  to  sell  them.  Thus,  the  manufac- 
turer of  a  phonograph  must  first  of  all  convince  the  prospect 
that  he  wants  an  instrument  of  this  kind.  And  if  the  pros- 
pect's ability  to  spend,  or  his  willingness  to  spend,  is  limited, 
he  must  be  persuaded  that  he  wants  the  phonograph  more 

5  See  pp.  12-16,  112-114. 


FINAL  CRITICISM  523 

than  he  wants  a  chair,  or  a  new  suit,  or  new  paper  on  the 
wall,  or  that  his  desire  for  it  is  greater  than  his  desire  to  put 
that  amount  of  money  into  securities  or  in  the  bank.  All  of 
these  and  many  other  products  and  services  are  competing  for 
the  consumer's  income,  which  for  most  individuals  is  at  best 
enough  to  buy  but  a  small  number  of  the  different  commodities 
offered  for  sale. 

In  addition  to  the  sales  efforts  which  have  jusf  en  de- 
scribed, however,  is  that  which  is  made  to  indu  .;  pur- 
chaser to  buy  a  particular  manufacturer's  product  er  than 
those  of  competing  manufacturers  who  make  a  si  product 

— to  induce  the  purchaser  desirous  of  buying  nausic  box 
to  buy  a  particular  make  rather  than  any  one  v  a  dozen  or 
more  brands  offered  on  the  market.  It  is  evid<.  m,  that  efforts 
of  this  kind  arise  out  of  the  fact  that  the  consumer  is  not 
"educated"  to  a  realization  of  the  "value"  of  the  products 
offered  for  sale,  and,  more  especially,  to  the  further  fact  that 
there  are  neither  definite,  tangible  criteria  by  which  he  can 
judge  and  compare  goods  meeting  the  same  need,  nor  means 
by  which  'he  can  evaluate  the  relative  utility  of  goods  catering 
to  his  different  wants.  It js^essential  to  their  success^then. 
for  vendors  to  convince  the  prospective  cr>ng1irnpr  t.Vin.fThgir^ 
particular  product  is  the  one  most  desired  by  him.  This  is 
costly. 

Such  Costs  Eliminated  Wherr  Recognized  Standards  Pre- 
vail.— Now  extreme  manifestations  of  this  problem  do  not 
arise  in  the  sale  of  goods  that  can  be  definitely  measured  as 
to  quality  and  character.  The  purely  competitive  costs  in 
particular  arei  not  found.  It  was  shown  in  Chapter  VI 
that  this  is  true  of  most  raw  materials.6  With  them,  quality 
can  be  readily  compared  on  a  basis  of  recognized  standards. 

6  This  is,  at  least,  ordinarily  true.  It  is  conceivable  that  farmers  who 
raise  corn  might  combine  and  advertise  so  as  to  educate  consumers  to 
the  value  of  corn  as  food,  just  as  California  fruit  growers  have  com- 
bined to  advertise  citrus  fruits.  The  Fleischmann  Yeast  Company  is  en- 
deavoring to  stimulate  a  greater  demand  for  bread,  'which  is  commonly 
thought  of  as  having  in  this  country  a  relatively  inelastic  demand. 


524  PRINCIPLES  OF  MARKETING 

Competition,  therefore,  is  on  a  price  basis,  and  he  who  can 
produce  and  deliver  most  cheaply  geEs~~-the  best  results,  and 
only  the  most  efficient  producers  can  continue  in  business. 
Even  when  such  goods  are  not  graded  and  standardized,  the 
buyer  is  usually  skilled  and  so  demand  creative  effort  can  be 
of  little  avail  to  the  seller.7  This  is  true  of  most  other  classes 
of  production  goods,  and  of  standard  equipment. 

Branded  Staples  Introduced  to  Reduce  Price  Competition 
and  Co'ntrol  the  Market. — But  in  differentiating  their  product 
so  as  to  obtain  a  more  secure  position  in  the  market,  manu- 
facturers of  consumption  goods  and  of  special  equipment  have 
made  it  difficult  to  compare  their  goods  with  other  goods 
which  are  made  to  meet  the  same  demand.8  Having  differ- 
entiated his  product,  the  manufacturer  tries  to  hold  the 
market  by  individualizing  it  in  some  way  and  endeavor- 
ing to  build  up  for  it  a  good  will  which  will  be  strong  enough 
to  counteract  competition  on  a  pure  price  basis.  In  other 
words,  the  product  is  differentiated  so  that  it  cannot  be  readily 
compared  with  others  on  a  price  basis,  or  even  on  a  quality 
basis.  When  the  product  has  been  thus  differentiated  and  a 
demand  created  for  it,  an  endeavor  is  made  to  hold  that  de- 
mand through  the  process  of  individualization,  which  fixes 
the  pa-rticular  brand,  rather  than  the  general  type  of  product, 
in  the  mind  of  the  purchaser.9 

Out  of  this  condition  has  also  arisen  what  has  come  to  be 
known  as  the  branded  staple — a  staple  sold  by  "specialty" 
methods.  The  reason  for  branding  a  staple  is  to  shift  the 
general  demand  for  a  staple  commodity  into  a  specific  demand 
for  a  particular  brand  of  that  commodity.  It  is  not  correct 
to  say  that  these  products  are  the  old  product  merely  changed 

7  Except  as  to  "service,"  i.e.,  credit,  deliveries,  etc. 

8  Although  the  word  "manufacturers"  is  used,  the  problem  and  the 
practice  are  found  in  wholesaling  and  in  retailing  this  class  of  goods, 
and  influence  both  wholesalers  and  retailers. 

9  Kodak  rather  than  camera,  for  example ;  Victrola  rather  than  phono- 
graph.    But  definite  social  economies  may  result  in  the  long  run.     See 
p.  16. 


FINAL  CRITICISM  525 

in  some  unimportant  manner.  Very  often,  in  fact,  they  are 
definitely  improved  and  even  if  the  quality  could  be  exactly 
determined,  evaluated,  and  compared,  they  would  sell  in 
preference  to  cheaper  products  or  similar  products  at  the  same 
price.  But  it  is  sometimes  argued  that  the  point  to  be  made 
in  this  connection  is  that  such  methods  enable  many  firms  to 
remain  in  business  longer  than  they  would  if  the  "improve- 
ments" had  not  been  made  or  if  they  could  be  definitely  meas- 
ured and  evaluated.  In  such  cases,  the  good  wjll  which  a 
firm  builds  up  tends  also  to  hinder  fhe  socially  desirable 
results  of  competition.  Finally,  such  selling  methods  lead  also 
to  excessive  duplication  of  an  expensive  machine*?  for  creat- 
ing demand.10 

In  so  far  as  branding  shifts  competition  from  a  measurable 
(price)  basis  to  what  is  often,  for  the  ordinary  ultimate 
consumer,  an  unmeasurable  (quality)  basis,  it  makes  market- 
ing more  complex.  To  say  that  quality  must  be  measured 
in  either  case  does  not  refute  this  argument,  because,  in  the 
case  of  many  branded  staples,  the  "quality"  said  to  inhere  in 
the  product  is  some  added  "selling  point"  over  and  above 
basic  qualities,  one  usually  difficult  for  the  consumer  to  meas- 
ure on  his  scale  of  values,  or  to  compare  with  other  similar 
products.11  Now,  of  course,  improved  products  are  desirable 

10  On  the  other  hand,  although  certain  results  of  extreme  competition 
are  generally  recognized  as  undesirable,  a  good  argument  can  be  offered 
to  show  that  shifting  competition  from  a  price  to  a  quality  basis  is  a 
distinct  improvement  in  merchandising.    See  A.  W.  Shaw,  "Some  Prob- 
lems in  Market  Distribution,"  Quarterly  Journal  oj  Economics,  Vol. 
XXVI,  pp.  742-746,  and  infra.,  p.  403. 

11  "The  consensus  of  opinion  among  those  who  have  given  this  prob- 
lem careful  study  and  have  built  their  sales  successes  on  it,  has  de- 
veloped these  basic  principles: 

"a.  The  merchandise  must  have  at  least  one  vital  point  in  which  it 
excels  competitive  merchandise.  .  .  . 

"It  is  actually  wise  to  reshape  merchandise  which  has  no  vital  argu- 
mentative individuality,  so  that  it  does  have  an  individuality.  Often 
there  is  excellent  sales  individuality  in  .the  process  of  manufacture  or 


526  PRINCIPLES  OF  MARKETING 

and  many  of  these  undoubtedly  are  improvements,  but  the 
unfortunate  result  is  the  excessive  amount  of  sales  pffnrt.  tV|ff_t,  is 
pivMVrcth  to  irrfiat-p  demand.  For  when  characteristics  are 
hard  to  measure  and  to  evaluate,  it  is  difficult  and  expensive  to 
buy  and  sell  and  the  result  may  be  that  the  social  costs  of 
demand  creation  become  excessive.  In  this  emphasis  upon 
quality  and  differentiation,  the  consumer's  normal  desire  for 
something  good  and  for  something  different  is  preyed  upon  in 
an  extreme  degree  by  those  who  would  sell  products.  Of 
course,  in  so  far  as  this  process  leads  to  large  markets  and 
large  scale  production,  with  lowered  costs,  the  net  result  is  an 
improvement.  An  improvement  in  merchandising  also  results 
from  the  fact  that  when  once  he  has  found  goods  which  satisfy, 
the  consumer  can  thereafter  buy  by  brand,  and  hence  by  de- 
scription, rather  than  by  inspection  or  sample. 

Cause  for  Excessive  Selling  Cost :  Inability  of  Consumer 
to  Judge. — The  conditions  which  make  necessary  this  ex- 
cessive competitive  cost  of  selling  have  been  discussed  in 
previous  chapters.  The  conditions  which  render  it  possible 
arise  out  of  the  inability  of  the  consumer  to  judge  readily  the 
exact  characteristics  of  the  various  products,  to  compare 
them  readily  with  similar  products,  and  to  place  them  in  his 
value  scale  in  relation  to  other  products  of  different  kinds, 
which  are  nevertheless  competing  for  his  purchasing  power. 
The  consumer's  inability  to  do  these  things  is  in  part  due  (1) 
to  the  failure  to  develop  any  method  by  which  the  physical 
characteristics  of  the  goods  can  be  properly  graded  and  classi- 
fied and  hence  compared;  (2)  it  arises  further  out  of  the 
different  reactions  of  prospective  purchasers  to  specific  char- 
acteristics of  merchandise;  and  (3)  it  is  caused  in  part  by  the 
lack  of  time  and  inclination  to  "shop,"  learn  qualities,  etc.12 

quality  which  has  been  overlooked." — J.  G.  Frederick,  Modern  Sales- 
management  (1919),  pp.  19-20.    [The  italics  in  the  quotation  are  mine.] 
See  also  A.  W.  Shaw,  An  Approach  to  Business  Problems  (1916),  pp. 
245-254. 
92  See  Chaps.  XIX  and  XXI. 


FINAL  CRITICISM  527 

In  the  case  of  goods  sold  at  retail,  there  usually  are  no 
generally  accepted  grades.  The  purchaser,  too,  is  by  no 
means  ^an  expert,  or  if  he  is  an  expert  in  purchasing  a  few 
things,  it  is  impossible  for  him  to  be  an  expert  over  the  great 
range  of  products  that  must  be  bought  by  the  average  con- 
sumer. And,  furthermore,  the  small  size  of  retail  transac- 
tions does  not  warrant  the  buyer  in  making  the  effort  to  be- 
come expert,  or  to  take  the  necessary  time  for  examination  if 
he  is.  The  varying  reactions  of  buyers  to  goods  can  merely  be 
suggested.  They  relate  to  characterictics  of  goods  which  can- 
not be  generally  graded  or  described,  and  the  reactions  to 
which  vary  between  individuals  and  even  with  the  same  in- 
dividual at  different  times  and  under  different  conditions.13 
From  these  facts  it  follows  that  theaverage  consumer  does  not 
know  precisely  what  he  wants,  and  he  cannot  judge  products 
in  relation  to  his  wants  and  in  relation  to  other  products. 
Competing  manufacturers  and  retailers  try,  consequently,  to 
help  him  decide,  in  favor  of  their  merchandise. 

II 

Importance  of  Standardization  to  Improved  Marketing. — 
The  use  of  standards  in  the  sale  of  many  production  goods, 
and  the  possibility  of  technical  tests  of  the  qualities  of  others 
constitute  one  great  element  in  reducing  their  costs  of  mar- 
keting. Such  goods  do  not  have  to  be  "sold,"  as  do  many 
consumption  goods.  Their  characteristics  once  determined, 
the  buyer  is  then  in  a  position  to  decide  intelligently,  regard- 
less of  sales  pressure,  whether  they  are  worth  as  much  as 
other  goods  which  he  has  the  opportunity  to  buy,  or  whether 
they  are  worth  the  price  at  all.  This  last  point  he  can  decide 
on  the  basis  of  his  known  costs  of  production  and  the  antici- 
pated selling  price  of  the  merchandise.  But  the  finished  prod- 
ucts that  emerge  from  these  raw  materials  are  divided  into  in- 
numerable grades,  and  often  have  the  intangible  and  in- 

13  See  pp.  405-406. 


528  PRINCIPLES  OF  MARKETING 

definite  characteristics  which  have  been  mentioned.  This  is 
true  because,  in  the  finished  product  destined  for  the  ulti- 
mate consumer,  style  and  appearance  are  often  important. 
These  cannot  be  evaluated,  or,  at  least,  are  not,  by  simple 
physical,  mechanical,  or  chemical  tests,  as  can  the  qualities 
of  raw  materials.  In  consequence,  many  products  differ  from 
each  other  "by  the  intangible  and  esthetic  qualities  of  shape, 
color,  and  design,  which  cannot  be  reduced  to  a  single  me- 
chanical standard."  14 

But  even  the  material  content  of  consumption  goods  is 
more  or  less  unknown.  The  consumer  does  not  know  the  real 
content  of  his  clothing,  whether  wool,  wool  and  cotton,  or 
shoddy;15  of  his  canned  goods,  the  quality  of  the  product,  its 
purity,  or  the  amount  of  water  or  other  useless  ingredient  in- 

14  Homer  Hoyt,  "Concentration  and  Its  Relation  to  Industrial  Stand- 
ardization," The  Annals  oj  the  American  Academy  (Mar.,  1919),  pp. 
271-277. 

""The  Winsted  Hosiery  Co.  v.  Federal  Trade  Commission,  272  Fed. 
957  (CCA.  Second  Circuit). 

"The  complaint  in  this  case  charged  that  respondent  had  manufac- 
tured and  sold  underwear  made  of  a  small  amount  of  wool  and  a  large 
amount  of  cotton,  which  it  labeled,  advertised,  and  branded  as  'Merino/ 
'Wool/  or  'Worsted.'  To  the  complaint  the  respondent  made  answer 
which  was  in  effect  a  confession  and  avoidance,  and  attempted  to  justify 
the  practice  upon  the  theory  that  it  had  become  universal  and  was  well 
recognized  by  the  distributors  of  underwear.  An  order  to  cease  and 
desist  from  the  practices  charged  in  the  complaint  was  issued,  where- 
upon the  respondent  petitioned  the  Circuit  Court  of  Appeals,  Second 
Circuit,  for  a  review  of  the  Commission's  order.  The  court,  on  April 
13,  1921,  filed  its  opinion  and  reversed  the  order  of  the  Commission. 
Thereafter  the  Commission  applied  to  the  Supreme  Court  of  the  United 
States  for  a  writ  of  certiorari  to  review  the  decree  of  the  Circuit  Court 
of  Appeals,  which  writ  was  granted  on  June  6,  1921.  The  question 
presented  in  the  petition  for  certiorari  was  whether  the  misbranding  of 
garments  made  of  cotton  and  wool,  which  misleads  the  consuming  public 
into  the  belief  that  such  garments  are  made  wholly  of  wool,  thereby 
injuring  competitors  who  correctly  labeled  their  products,  constitutes 
an  unfair  method  of  competition  within  the  purview  of  section  5  of  the 
commission  act."— Annual  Report  oj  the  Federal  Trade  Commission 
(1921),  pp.  29-30. 


FINAL  CRITICISM  529 

eluded;  or  the  technical  utility  of  the  content  of  his  tooth- 
paste, although  he  may  know  that  the  container  it  is  sold 
in  enables  him  to  use  it  more  easily  than  any  competing 
brand.  Consequently,  he  cannot  buy  scientifically,  nor  with 
certainty.  And,  again,  the  manufacturer  who  can  "puff"  such 
wares  with  greatest  success  is  the  most  likely  to  make  sales. 
This  is  particularly  the  case  where  there  is  really  little  of 
ascertainable  physical  difference  between  the  competing 
products. 

Who  Is  Responsible? — Responsibility  for  this  medley  of 
designs  can  be  laid  fundamentally^  t  the  Hnnr  nf  the  con- 
sumer, to  his_desir?  for  variety  and  distinction.  But,  on  the 
other  hand,  this  desire  has  t>een  assiduously  cultivated  by 
sellers  and  has  been  played  upon  excessively  as  a  result  of  the 
competition  of  manufacturers  and  other  vendors.16 

Psychical  Element  in  Sales. — Some  of  the  more  extreme 
appeals  that  are  made  upon  psychical  elements  in  buying  are 
interesting.  We  are  told  that  this  is  the  "highest  priced"  flour, 
varnish,  or  car  on  the  market,  not  that  it  is  the  best,  although 
that  may  be  inferred.  But  the  very  fact  that  it  is  highest  in 
price  gives  it  a  psychical  value  in  the  minds  of  many  pur- 
chasers that  it  would  not  otherwise  have.  It  is  said  that  when 
the  price  of  a  well  known  automobile  was  cut  one-third,  the 
sales  fell  off  at  once.  This  was  probably  due  to  a  variety 
of  causes — to  fear  by  some  that  the  quality  of  the  car  would 
be  lowered,  although  it  was  guaranteed  that  it  would  not 
be,  but  more  likely  because  the  price  was  still  too  high  for 
small  purchasers,  and  because  the  automobile  did  not  now 
meet  the  demands  ofsthe  class  who  desired  to  be  known  as 
having  expensive  cars.  A  phonograph  sold  by  a  large  mail 
order  house  is  said  to  be  the  equal  of  any  on  the  market,  but 
there  are  large  numbers  of  buyers  who,  even  though  they 
did  believe  this  to  be  true,  would  not  buy  it.  They  would 

18  Note  the  successful  efforts  of  a  few  years  back  to  introduce  frequent 
style  changes  in  women's  shoes,  and  more  recently  a  similar  attempt 
with  men's  shoes  and  now,  even  spectacles! 


530  PRINCIPLES  OF  MARKETING 

hesitate  to  tell  their  friends  that  they  bought  it  through  the 
mail  order  house,  with  the  inference  to  be  drawn  therefrom 
that  they  did  so  to  save  money.  Some  stores  even  advertise 
to  the  effect  that  "we  charge  a  little  more,  but  our  service 
and  our  products  are,  oh!  so  superior."  Others  suggest  it,  and 
many  others  by  stressing  "quality"  and  "service"  draw  at- 
tention away  from  their  higher  prices.  Even  though  superior 
quality  actually  inheres  in  certain  products  the  Hpsirp^fnr  d^*- 
tinction  rather  than  the  fact  that  they  are  better  goods, often 
prompts  their  purchase. 

Ill 

The  Middleman  System  and  Marketing  Costs. — A  com- 
mon cause  which  is  assigned  for  the  high  cost  of  marketing 
is  the  middleman  system.  It  is  charged  that  there  are  "too 
many  middlemen." 

It  was  shown  in  Chapter  XIV  that  the  problems  concerning 
middlemen  are  really  of  two  kinds.  First,  are  there  too  many 
kinds  of  independent  middlemen  handling  products  on  the  way 
from  producer  to  consumer,  and,  second,  are  there  too  many 
middlemen  attempting  to  perform  each  service?  v  One  arises 
out  of  the  feeling  that  there  are  too  many  grocers,  butchers, 
jobbers,  hardware  merchants;  the  other  is  produced  by  the 
belief  that  too  many  different  kinds  of  middlemen  "take  their 
profit"  out  of  the  final  retail  price  before  the  product  reaches 
the  ultimate  consumer,  v 

Are  There  Too  Many  Competing  Firms? — It  has  already 
been  suggested  in  this  chapter  that  the  excessive  costs  of 
competition  arise  in  part  out  of  the  fact  that  there  is  an 
excessive  number  of  competing  products  in  the  market.  The 
complaint,  consequently,  that  competition  is  excessive  is  not 
confined  to  those  competitors,  commonly  called  middlemen, 
offering  marketing  services;  it  is  found  throughout  all  business. 
There  are  too  many  manufacturers  of  competing  products,  and 
too  many  railroads  in  some  parts  of  the  country,  as  well  as 


FINAL  CRITICISM  531 

too  many  middlemen.17  At  least  as  far  as  efficiency  at  a 
given  time,  as  contrasted  with  the  competitive  results  over 
a  long  period  of  time  as  evidenced  in  better  methods,  is  con- 
cerned, this  seems  to  be  a  safe  conclusion — for  those  indus- 
tries which  have  not  been  in  large  part  monopolized.  The 
lure  of  profit  and  the  desire  to  be  independent  are  so  strong 
that  men  will  start  a  competing  factory,  or  a  competing  retail 
or  wholesale  store,  when  those  already  operating  are  perfectly 
capable  of  meeting  the  needs  of  the  market;  and  when  those 
already  functioning,  by  operating  on  a  large  scale,  could  if 
left  alone  probably  produce  and  market  the  goods  at  a 
smaller  cost  than  is  possible  when  more  competitors  enter  the 

"The  following  quotation  summarizes  some  of  the  points  thus  far 
discussed  as  related  to  a  specific  industry:  "In  a  survey  of  the  distribu- 
tion of  wheat  and  flour,  three  things  are  noticeable:  the  intensely 
competitive  character  of  the  business,  the  excess  in  equipment  for 
distribution,  and  the  desire  for  independence  of  the  people  engaged 
in  production  and  distribution.  If  one  farmer  will  not  sell  his  wheat 
at  the  price  offered  another  farmer  will.  Local  dealers,  jobbers,  and 
millers  bid  against  each  other  in  buying  and  selling.  Flour  is  made  in 
the  town  of  A  and  shipped  by  rail  to  be  sold  in  the  town  of  B,  while 
flour  made  in  B  is  sold  in  A.  A  grocer  in  the  east  end  of  town  hauls 
flour  across  the  city  to  a  customer  in  the  west  end  of  town,  and  the 
grocer  in  the  west  end  delivers  to  a  customer  in  the  east  end.  The 
Minnesota  miller  sometimes  buys  Kansas  wheat  and  the  Kansas  house- 
keeper sometimes  insists  on  having  Minnesota  flour.  And  not  only  are 
the  products  crossing  trails  in  distribution,  but  traveling  salesmen  of 
the  many  mills  and  flour  jobbers  are  duplicating  their  labors  in  the  same 
territory.  Beginning  with  production,  there  are  more  seeding  and 
harvesting  machines  in  the  hands  of  farmers  than  would  be  needed  if 
there  were  cooperation  in  production  and  each  machine  kept  in  opera- 
tion the  entire  harvest  season.  There  are  more  elevators  in  the  wheat 
area  than  are  needed,  each  operating  most  of  the  time  on  less  than  its 
full  capacity.  In  some  sections,  there  is  needless  duplication  of  railroad 
trackage.  More  grain  jobbers  and  commission  men  are  in  the  field  than 
can  find  continuous  business.  It  is  asserted  that  the  mills  of  the  United 
States  could  grind  all  the  wheat  raised  in  the  United  States  in  144  days 
(24  hours  per  day)." — J.  C.  Bowen,  Wheat  and  Flour  Prices  from 
Farmer  to  Consumer,  United  States  Bureau  of  Labor  Statistics,  Bui. 
No.  130  (1913),  p.  14. 


532  PRINCIPLES  OF  MARKETING 

field.  That  is,  the  larger  number  of  competitors  possibly  re- 
sults in  increasing  the  costs  of  selling.  Even  if  the  introduc- 
tion of  new  firms  does  not  decrease  the  existing  scale  of  opera- 
tion, it  may  limit  possible  increases  in  the  size  of  individual 
firms.  In  this  way  it  may  hinder  savings  from  large  scale 
operation  in  industries  where  that  is  important.18 

Facts  to  substantiate  such  an  argument  can  be  readily 
found  in  some  industries.  Thus,  when  the  whiskey  trust  was 
formed,  some  eighty  or  eighty-five  competing  distilleries  were 
combined  and  all  but  seventeen  were  shut  down.  These  seven- 
teen continued  to  produce  as  great  a  supply  as  the  market 
demanded.  Familiar  examples  of  an  excessive  number  of 
competitors  are  found  in  the  case  of  milk  delivery  and  of  the 
delivery  of  store  products  to  consumers.19  The  figures  quoted 
on  page  515  from  the  study  of  grocery  costs  made  by  the  Wis- 
consin Experiment  Station  likewise  show  that  the  smallest 
stores  operate  at  a  higher  cost  than  do  the  stores  of  medium 
size.  As  was  shown  in  previous  chapters,  the  results  of  such 
excessive  competition  are  a  great  duplication  of  plant  and 
equipment,  an  excess  of  overhead  expense,  and  unnecessarily 
large  stocks  of  merchandise.  In  addition  to  these  evils  is  the 
cost  of  demand  creation  which  results  from  the  efforts  of  each 
competitor  to  obtain  a  sufficient  part  of  the  available  demand 
to  enable  him  to  continue  in  business,  or  to  utilize  an  existing 
plant  capacity  to  the  fullest  extent,  or  to  make  it  possible  to 
increase  his  volume  of  sales — often  with  a  view  to  reducing 
costs  of  production,  costs  of  selling,  or  both. 

We  have  seen  that  the  greatest  cost  of  marketing  consump- 
tion goods  is  usually  found  in  the  final  link  of  the  chain  of 
distribution,  namely,  the  retailer.  It  is  in  retailing,  likewise, 
that  by  far  the  greatest  number  of  competing  middlemen  are 
found,  and  that  the  smallest  volume  of  business  is  performed 
by  individual  dealers.  It  is  here  then  that  this  evil  is  found 

18  See  p.  290. 

19  See  also  The  Glass  Industry,  U.  S.  Bureau  of  Foreign  and  Domestic 
Commerce,  Miscellaneous  Series,  No.  60  (1917). 


FINAL  CRITICISM  533 

in  its  most  acute  form.  Is  it  possible  and  desirable  to  elimi- 
nate some  of  this  "excessive"  number  of  retail  dealers? 

Meaning  of  the  Term  "Too  Many  Stores."— At  the  outset, 
the  question  arises,  just  what  is  meant  by  stating  that  there 
may  be  too  many  retail  stores?  If  it  means  that  there  are  too 
mnriy^JnHpppnHfnt  owners^,  then  the  chain  store,  large  coop- 
erative societies,  department  stores,  and  large  mail  order 
retailers  may  be  the  answer.  If  it  means  that  there  are  too 
many  individual  store  units,  regardless  of  ownership,  another 
problem  presents  itself.  It  is  in  this  latter  form  that  the 
question  does  arise  although  the  economies  which  may  be 
derived  from  the  central  control  exercised  by  chain  stores  over 
the  local  units  make  so  definite  a  declaration  of  the  problem 
impossible.  Stating  it  more  precisely,  are  there  too  many 
stores  to  achieve  the  best  service  for  the  price  that  is  paid?  20 

Relation  of  Number  of  Stores  to  Volume  of  Business. — 
In  the  course  of  coming  to  a  conclusion  on  this  point,  con- 
sideration should  not  be  given  primarily  to  the  number  of 
stores  in  relation  to  the  population,  but  to  the  number  of 
stores  in  relation  to  the  amount  of  work  performed.  That  the 
number  of  retail  stores  compared  with  the  total  population 
in  the  United  States  is  greater  in  relation  to  the  population 
to-day  than  it  was  in  1850,  for  example,  seems  to  be  unques- 
tionable.21 But  if  the  increased  number  of  stores  is  compared 
with  the  increased  volume  of  products  handled  through  them, 
it  is  found  that  the  average  value  and  volume  of  goods  handled 
is  very  much  greater  now  than  previously.  Although  a  part 
of  this  may  be  due  to  the  general  rise  of  prices,  other  causes 
are  important.  For  it  is  during  this  period  that  many  products 

20  See,  for  example,  Chas.  P.  Steinmetz,  America  and  the  New  Epoch 
(1916),  especially  Chap.  IV,  and  E.  P.  Harris,  Cooperation,  the  Hope 
of  the  Consumer  (1918),  pp.  57  ff. 

aNystrom  shows  (Economics  of  Retailing  [2d  ed.l,  p.  331)  that  there 
were,  according  to  the  Census  figures,  7.51  merchants  (largely  retail 
merchants)  to  each  1000  of  population  in  1850;  this  increased  to  11.4  in 
1890  and  since  then  has  remained  relatively  constant — at  10.97  in  1900 
and  10.92  in  1910. 


534  PRINCIPLES  OF  MARKETING 

formerly  made  in  the  home  have  come  to  be  made  in  manu- 
facturing plants.  And  during  the  same  period  there  has  been 
a  great  increase  in  the  volume  of  farm  products  handled 
through  stores,  as  well  as  in  the  consumption  of  merchandise 
produced  in  remote  regions.  An  increased  proportion  of  the 
population  cannot  buy  directly  from  producers  and  do  not 
have  'their  own  home  manufacture,  farms,  gardens,  etc.,  to 
draw  from.22 

More  Market  Machinery  a  Result  of  Modern  Methods  of 
Production. — The  result  of  specialization  in  industry  and  of 
the  increase  in  the  variety  of  products  the  ordinary  person 
consumes  has  been  to  increase  the  amount  of  distributive 
work  that  has  to  be  done.  It  has  been  shown  that  a  part 
of  the  economies  of  modern  large  scale  production  have  been 
offset  by  the  increased  cost  of  distributing  the  products 
produced  under  these  conditions.23  Moreover,  the  increased 
well-being  of  the  American  people  has  made  available  to  them 
many  new  products  and  products  from  distant  places.  To 
distribute  these  has  further  increased  the  amount'  of  market 
activity  necessary  in  modern  society. 

It  seems,  then,  returning  to  retailing,  that  the  increase  in 
the  number  of  stores  has  not  been  so  great  as  has  the  increase 
in  the  volume  of  business  they  have  been  called  upon  to  per- 
form. But  this  does  not  answer  the  final  question,  that  there 
may  nevertheless  be  a  larger  number  of  stores  than  is  required 
toeive  the  best  service  at  the  least_cost,  and  that  the  number 
may~T5B~so  luige  as-actually  to  militate  against  the  acquire- 
ment of  the  best  service  at  the  least  cost.  In  a  period  in 
which  large  scale  methods  of  production  and  large  scale  retail- 
ing have  been  developing,  is  the  tendency  for  small  retail  stores 
to  hold  the  field  in  great  numbers  a  cause  for  inefficient  and 
costly  retail  service? 

Excessive  Costs  of  Retailing  Not  all  Borne  by  the  Imme- 

22  For  a  statistical  study,  the  reader  is  again  referred  to  Nystrom,  op. 
cit.,  pp.  333  ff. 

23  See  pp.  503-504. 


FINAL  CRITICISM  535 

diate  Consumer. — First  of  all  it  is  by  no  means  certain  that 
the  excessive  costs  of  retailing  are  entirely  borne  by  the  im- 
mediate consumer,  at  least  in  the  first  instance.  Thus, 
Nystrom  has  pointed  out 24  that  although  but  10  to  20  per 
cent  of  those  who  start  stores  are  able  to  continue  in  business, 
and  an  even  smaller  number  truly  succeed,  the  great  majority 
of  those  who  start  do  not  fail  in  the  sense  that  they  bring  loss 
to  their  creditors.  Rather,  they  fail  in  the  sense  that  the  pro- 
prietors see  the  original  capital  with  which  they  entered  busi- 
ness diminishing  and  withdraw,  without  their  own  capital,  but 
before  their  creditors  suffer.  Even  so,  this  is  expensive;  al- 
though it  is  the  method  by  which  the  fit  are  separated  from 
the  unfit  in  a  competitive  society.  Again,  it  is  not  at  all  evi- 
dent that  large  scale  retailing  is  more  efficient  in  so  far  as  the 
costs  of  operation  are  concerned.  In  fact,  the  costs  of  selling 
of  department  stores  and  large  stores  generally,  with  the  pos- 
sible exception  of  chain  stores,  are  thought  to  be  greater  than 
the  costs  of  small  competing  stores  when  efficiently  operated.25 
In  other  words,  there  is  some  reason  to  beliey^fekat  retailing 
reaches  a_j^>ndition  of  diminishing^  returnsy  after^a^ertam 
indefinitejDoint,  as  the  size  of  the  establishment  increases.26 

Advantages  of  Small  Store  to  Consumer. — Much  can  be 
said  for  the  small  retail  store  as  a  service  of  convenience  to 
consumers,  which  must  be  considered  as  an  offset  to  their 
operating  inefficiencies.  Whereas  the  large  store  is  usually  at 
some  distance,  the  small  store  can  be  close  at  hand  for  quick 
purchases  and  rapid  service,  and  so  performs  a  very  real 
service  and  one  worth  paying  for.  When  we  consider  that  it 
is  doubtful  whether  the  public  does  have  to  pay  much,  if  any, 
more  than  it  would  if  there  were  fewer,  and  consequently, 

34  Nystrom,  op.  tit.,  Chap.  XVIII. 

25  See  Chap.  XII. 

MNourse  (The  Chicago  Produce  Market,  pp.  114-115)  raises  the  same 
point  in  connection  with  the  jobbing  of  produce,  and  figures  were 
quoted,  supra,  pp.  150,  152,  to  show  that  this  is  likewise  true  of  jobbers 
handling  staple  manufactured  products. 


536  PRINCIPLES  OF  MARKETING 


larger  stores,  it  evidently  ™ay  be  qnpRtj™^  whpfhpr  a 
decrease  in  the  number  of  stores  would  be  of  great  benefit 
to  the  public.  Although  this,  cost  must  be  borne  by  society 
in  the  long  run,  it  must  be  remembered  that  it  is  the  price 
which  we  pay  for  the  "benefits"  of  competition. 

Question  of  the  Economies  of  Large  Retail  Stores.  —  If 
there  were  very  great  economies  in  large  scale  retailing,  it 
would  seem  that  the  large  store  would  long  since  have  elimi- 
nated its  smaller  competitor,  as  large  factories  have  super- 
seded smaller  ones  in  some  fields  of  manufacture.  But  this 
has  not  occurred  in  any  sensible  degree.  An  exception  to  this 
may  be  the  recent  rapid  growth  of  the  chain  store  which  com- 
bines the  advantages  of  the  small  store,  from  the  point  of  view 
of  service  and  store  cost,  with  the  advantages  of  more  efficient 
central  administration  and  the  purchasing  advantages  of  the 
large  store.  If  the  larger  store  becomes  more  efficient,  it  is 
likely  that  we  may  expect  to  see  it  supersede  small  stores. 
Competition  in  retailing  is  very  keen  and  it  seems  that  al- 
though inefficiency  is  great  and  the  death  rate  among  retailers 
is  large,  the  persistence  of  successful  small^stiO^«  in  Hippos 
t.WJihpy  ppxform  these  services  at  a  cost  whichjs^satis  factory 
to  the  consumer^  at  least  in  relation  to  large  store  service  and 
costs.  If  this  is  true,  it  appears  that  the  results  of  inefficiency 
can  be  best  met  by  education  in  business  methods  rather  than 
through  steps  to  curtail  the  number  of  retail  stores.27 

It  would  seem  that  similar  arguments  can  be  employed  in 
the  case  of  other  classes  of  middlemen  generally.28  In  whole- 
sale selling,  however,  units  are  larger  and  the  degree  'e£-effi- 
ciency  is  greater,  because  the  range  of  services  performed  is 
smaller.  Buyers  are  more  skilled  and  purchase  in  large 

"Some  suggestions  for  limiting  the  number  of  retailers  are  discussed 
in  Nystrom,  op.  cit.,  Chaps.  XIX-XXI. 

28  For  discussion  of  this  point  in  the  agricultural  wholesale  trade,  see 
Weld,  op.  cit.,  Chaps.  IV-VIII;  the  Report  of  the  Federal  Trade  Com- 
mission on  the  Canned  Food  Industry  ;  and  see  A.  W.  Shaw  Co.,  How  to 
Run  a  Wholesale  Business  at  a  Profit. 


FINAL  CRITICISM  537 

amounts,  and  price  is  more  important  in  meeting  competition.29 
Efficiency  is,  consequently,  more  quickly  sensed  by  the  cus- 
tomers, and  failure  comes  more  rapidly  to  the  inefficient. 

The  other  aspect  of  the  middlemen  problem — the  number  of 
successive  middlemen  involved — has  been  previously  discussed, 
and  it  is  unnecessary  to  pursue  the  question  further  at  this 
point.30 

"Profiteering"  Not  Confined  to  Middlemen. — A  common 
charge  against  middlemen  is  that  they  make  too  large  a  profit. 
But  as  a  general  rule  when  enormous  profits  are  made  by 
middlemen  they  do  not  arise  out  of  the  middleman's  service 
as  such,  but  out^  of  general  conditions  in  the  market.  For 
example,  success  in  holding  goods  for  a  high  price  is  due  to 
the  limitation  or  supposed  limitation  of  supply  during  a  rising 
market,  or  a  condition  of  greater  or  less  monopoly  control. 
These  situations  are  probably  as  often  taken  advantage  of  by 
t.hpprnHi^ppr  .  «q  hyjiie  middleman.  Indeed  there  is  a  greater 
incentive  for  the  producer  to  do  so,  for  his  profit  depends  upon 
his  receiving  a  high  price  for  his  product,  whereas  the  profit 
of  the  middleman  ordinarily  depends  upon  his  accomplishing 
a  large  number  of  exchanges,  for  himself  or  his  clients.31 

It  seems,  then,  that  the  real  problems  of  market  price  as 
affected  by  the  operations  of  middlemen  do  not  arise  out  of  the 
fact  that  middlemen  exist,  but  out  of  the^Jajit^ClwrtrsuppTies 
are  jDf£ei^rirrited  or,  from  the  point  of  view  of  the  producer, 
that  demand  is  limited  or  supply  is  too  great.  The  problem 
may  also  arise  from  inefficiejjcy,  which  is  not  an  evil  confhied 
to  middlemen  alone ;  and  from  the  lack  of  adequateirairket  si- 
formation,  which  affects  equally  all  parties  tu  tfte~ market. 

IV 

Some  Evils  of  Competition:  (i)  Excessive  Costs. — Some 
of  the  wasteful  practices  which  arise  under  the  competitive 

39  See  pp.  438-439. 
20  See  Chap.  XIV. 
31  See  the  discussion  of  turnover  in  Chap.  XI. 


538  PRINCIPLES  OF  MARKETING 

system  may  now  be  summarized.  The  difficulty  of  distributing 
products,  which  cannot  be  graded  in  such  a  way  that  unskilled 
or  busy  buyers  can  readily  determine  their  worth,  makes  neces- 
sary and  possible  enormous  sales  expense  on  the  part  of  ven- 
dors. This  sort  of  effort  involves  trying  to  make  consumers 
realize  that  "my  flour  is  really  better  than  Smith's  flour," 
while  Smith  and  Jones  and  Brown  are  all  trying  to  create  the 
same  belief  about  their  flour.  There  may  really  be  no  differ- 
ence, or  such  differences  as  there  are  may  not  be  reflected  in  the 
variations  in  price.  And  in  any  case,  the  process  is  extremely 
expensive.  Since  the  ultimate  consumer  has  no  very  definite 
way  of  determining  values  the  competing  manufacturers  or 
dealers,  or  both,  endeavor  to  make  him  think  as  they  wish  him 
to.  All  of  them  are  trying  at  great  cost  to  make  him  believe 
certain  things  about  their  product  which  he  finds  difficult  to 
verify.  For  if  they  could  be  easily  proved,  much  modern  sales 
effort  would  not  pay  because  it  could  do  no  more  than  an- 
nounce the  goods — the  consumer  would  judge  the  quality  with- 
out assistance  from  the  vendor. 

(2)  Excessive  Stocks. — Another  source  of  waste  is  the 
excessive  amount  of  capital  tied  up  in  duplicate  stock,  both  by 
manufacturers  and  merchants.  Take  as  an  illustration,  the 
grocer.  There  may  be  several  important  grades  and  brands 
of  certain  highly  advertised  canned  goods.  As  a  result  of 
"consumer  advertising,"  one  customer  asks  for  one  kind,  an- 
other for  another,  and  so  on.  For  the  customer  who  does  not 
seem  influenced  by  advertising,  the  grocer  may  have  another 
brand  which  he  prefers  to  sell.  Yet  he  must  keep  a  stock  of 
all,  for  if  a  customer  demands  one  brand  and  cannot  get  it,  he 
is  very  likely  to  go  where  he  can — not  merely  to  purchase 
this  brand  but  all  the  other  goods  he  buys.  That  is,  to  keep 
his  trade,  the  merchant  must  keep  on  hand  all  of  the  various 
brands  that  his  customers  demand.32  To  keep  enough  of  one 

32  Advertising  against  substitution  by  manufacturers  has  strengthened 
this  evil  by  making  the  consumer  feel  that  the  dealer  is  trying  to  cheat 
him  when  he  suggests  a  substitute.  Experience  shows,  however,  that 


FINAL  CRITICISM  539 

brand  on  hand  to  meet  all  demands  does  not  necessitate  nearly 
so  large  a  stock,  relatively,  as  it  does  to  carry  a  sufficient 
stock  of  all  brands  that  may  be  asked  for.  Twelve  cases  of 
one  brand  may  be  enough  to  have  on  hand.  If  several  brands 
are  sold  it  is  likely  that  four  or  five  cases  of  each  must  be 
stored,  which  although  a  smaller  amount  of  each  kind,  causes 
a  much  larger  total  supply  to  be  kept.  This  situation,  which 
is  duplicated  with  many  products,  influences  the  jobber  as  well 
as  the  retailer;  and  individual  manufacturers,  each  producing 
a  relatively  smaller  part  of  the  total  product  of  a  kind  than 
is  needed,  must  keep  a  relatively  large  stock  on  hand  to  meet 
possible  demands.33  Npprflfffl  to  pay  WP  do  not  wnnt  to  have 
standardization  carried  to  an  extreme.  But  surely,  the  legiti- 
mate desire  of  the  consumer  for  individuality  and^varietv  has 
been  abused  as  a  selling  point  by  competing  manufacturers 
and  dealers. 

To  the  costs  of  excessive  plant  and  equipment  for  pro- 
duction, administration,  and  selling  must  be  added  excessive 
plant,  equipment,  and  administration  in  the  field  of  physical 
distribution:  excessive  warehouse  facilities,  and  cross  freights 
in  transportation,  such  as  arise  when  a  Chicago  manufacturer 
sells  his  product  in  Detroit  or  New  York  and  similar  products 
manufactured  in  Detroit  and  New  York  are  sold  in  Chicago.34 

(3)  Competition  and  Quality. — Quality  is  not  guaranteed 
under  the  competitive  regime..  In  fact,  the  indivicftml  ppofit- 

the  average  dealer  can,  if  he  desires,  easily  influence  his  customers  to 
substitute  other  products  for  the  advertised  products  they  ask  for. 

33  As  illustrative  of  the  lack  of  standardization  which  is  at  least  partly 
responsible  for  this,  a  recent  writer  has  stated  that  there  are  100  shades 
of  household  paint,  518  patterns  of  piano  stool;  and  a  single  jobber  is 
said  to  have  had  in  stock  102  brands  of  coffee,  30  coffee  substitutes,  84 
makes  of  canned  beans,  75  kinds  of  cigars.    See  Homer  Hoyt,  op.  cit. 
The  Colorado  Elevator  Company  has  100  brands  of  flour.     See  also 
p.  138,  note  6. 

34  Generally  speaking,  however,  the  wastes  from  cross  freights  are  per- 
haps not  so  excessive  as  they  have  been  pictured,  because  for  many 
products,  in  the  absence  of  physical  deterioration,  transportation  costs 
make  up  a  very  small  part  of  the  cost  of  marketing. 


540  PRINCIPLES  OF  MARKETING 

seeking  at  the  base  of  our  economic  regime  which  is  depended 
upon  to  bring  this  about  has  a  tendency  to  defeat  that  very 
end.  Private  jyofit- seeking  emphasizes  pecuniary  profit 
rather  than  quality  of  product  nr  bpnpfimnl  social  results.  Xnd 
it  is  found  that  the  two  are  by  no  means  accomplished  in  the 
same  way  at  a  given  time.35  Even  though  they  tend  to  be 
similar  in  the  long  run,  that  result  is  interfered  with  through 
the  rapidly  changing  conditions  whffjh  are  now  present  in 
industry  and  commerce.  Partial  causes  for  this  are  the  facts 
that  the  range  of  products  has  become  so  broad,  the  varia- 
tions of  individual  products  are  so  great,  and  standards  for 
determining  value  vary  so  much  and  are  so  difficult  to  estab- 
lish, that  in  many  lines  of  goods,  there  are  no  means  by  which 
the  consumer  can  judge  of  the  relative  values  of  competing 
products.36 

(4)  Poor  Adjustment  of  Demand  and  Supply. — Another 
evident  shortcoming  of  competition  is  the  frequent  failure  of 
"demand  and  supply"  to  balance  properly.  This  results,  in 
some  cases,  simply  in  a  condition  of  overproduction  in  a  single 
industry.  In  other  cases,  it  results  in  a  decline  in  the  demand 
for  large  numbers  of  products  at  a  price  which  covers  the  costs 
of  their  production.  This  last  condition  is  a  basic  cause  for 
our  recurring  economic  crises.37 


Many  of  the  problems  which  arise  in  marketing  indicate 
eak  points  in  our  existing  economic  regime.     The  strength  of 

is  sy^em  and  its  weaknesses  were  summarized  in  Chapter 

— — •**^ 

XIV.    At  this  point  some  of  the  more  commonly  proposed 
remedies  for  the  wastes  of  competition  will  be  briefly  reviewed. 
(i)  Socialism. — Among  the  more  common  proposals  is  so- 

35  See  W.  C.  Mitchell,  Business  Cycles,  Chap.  II. 

38  See  Chap.  XIX. 

37  The  fundamental  need  for  the  proper  collection,  interpretation,  and 
dispersion  of  market  news  as  an  assistance  in  solving  such  problems  was 
discussed  in  Chap.  XVIII. 


FINAL  CRITICISM  541 

cialism,  as  variously  advocated  in  many  forms  and  with  varied 
purposes.  It  is  said^that  socialism  will  eliminate  wasteful 
competition  and  order  both  production  and  marketing  more 
closely  to  the  general  neeffo  nf  ^ngjpf.y  Various  plans  are 
offered  but  in  so  far  as  they  relate  to  the  elimination  of  the 
wastes  of  competition,  they  advocate  some  means  for  the 
social  control  of  industry,  the  purpose  of  which  will  be  to 
manage  it  in  such  a  way  that  demand  and  supply  will  be 
more  closely  related,  and  purely  competitive  selling  costs  will 
be  eliminated.  The  arguments  for  and  against  socialism  are 
familiar.  In  their  relation  to  marketing  they  center  largely 
about  the  question  of  the  relative  social  efficiency  of  the  com- 
petitive system  and  a  socialistic  regime.  It  is  a  question  of 
the  rphrHvp  pffpptjypnp^  of  a  fiys+pin  w*"^,  Hpgf"tfP  **-<?  wafitt" 
filings,  leads  in  the  long  nin  tn  ^p*-™^  mfthnHyj  ^H  so 
offsets  tjif  pvnpggivp  mp|s  nf  rnmpet.itinn,  arrf  the  effectiveness 
of  a  socialistic  society  which  may  be  able  to 
sive  costs  ot  marketing  under  an  existing  technical  standard, 
but  which  it  is  feared  would  also  result  in  stagnation  and  a 
failure  to  progress.38  In  other  words,  as  between  our  present 
method  of  control  and  socialistic  control,  it  appears  to  be 
necessary  to  make  a  choice  between  a  wastefuTprjjgress  or  an 
economical  stagnation.39 

(2)  Cooperation. — Another  important  system,  which,  it  is 
claimed,  has  already  brought  about  important  improvements 
in  marketing,  is  cooperation  by  consumer  and  producer  re- 
spectively. The  enormous  growth  of  consumer  cooperation 
in  Europe  and  England  and  of  producer  cooperation 
among  farmers  both  in  this  country  and  abroad  is  accepted 

38  The  Russian  experience  is  uppermost  in  the  public  mind  at  the  pres- 
ent time.    But  while  it  shows  many  of  the  pitfalls  of  socialized  industry 
the   Russian  conditions  are  fundamentally  so  different   from  those   in 
Western  Europe  and  America  that  analogies  can  hardly  be  drawn. 

39  For  a  fuller  discussion  of  these  questions,  the  reader  is  referred  to 
such   discussions  as  O.   D.  Skelton,  Socialism   (1911);    Edmond  Kelly, 
Twentieth   Century    Socialism    (1911);    Morris    Hillquit,    Socialism    in 
Theory  and  Practice  (1910) ;  and  John  Spargo,  Applied  Socialism  (1912). 


542  PRINCIPLES  OF  MARKETING 

as  an  indication  that  these  systems  of  marketing  have  proved 
beneficial  to  those  directly  interested.  Really  important  ^re- 
sults hftvftfinrng^  although^  many  of  the  savings  have  resulted 
fronr~tHeaurtailment  of  services  ordinarily  rendered  by 
private  merchandisers  to  their  patrons.  These  are  services 
which  merchandisers  have  rendered  either  because  they  were 
demanded  by  customers  or  because  competition  forced  sellers 
to  offer  them  in  order  to  gain  and  keep  their  trade  from  com- 
petitors. In  so  far,  however,  as  these  services  are  unnecessary, 
or  are  duplicated  on  a  small  and  inefficient  scale,  cooperation 
may  cause  a  real  gain,  and  in  so  far  as  the  high  costs  found 
in  creating  a  demand  for  products  in  a  competitive  market 
can  be  eliminated  through  such  systems,  there  is  a  further 
actual  benefit.40  Whether  such  a  system  will  ever  prevail 
generally  and  whether,  if  it  does  prevail,  progress  will  be 
stifled,  are  questions  on  which  much  difference  of  opinion  is 
found.  Many  people  •  believe  that  we  may  well  forego  some 
of  our  so-called  "progress,"  and,  by  ordering  our  lives  a 
little  more  conservatively,  perhaps  really  increase  total  well- 
being.41 

(3)  Public  Markets,  Parcel  Post,  and  Express. — Public 
markets,  and  the  delivery  of  products  by  parcel  post  and  ex- 
press, particularly  perishable  produce,  are  being  strongly  ad- 
vocated. Public  markets  at  which  farmers  and  consumers  meet 
for  exchange  will  probably  prove  to  be  of  greater  an(|  greater 
importance  as  good  roads  and  the  use  of  the  motor  truck 
extend  the  area  that  can  be  made  available  to  a  given  city 
market.  But  none  of  these  things  can  be  expected  to  revolu- 

40  Cooperation  was  discussed  in  Chap.  XIII.    See  also  S.  and  B.  Webb, 
The  Consumers'  Cooperative  Movement  (1921). 

41  In  this  connection,  it  is  interesting  to  note  that  the  cure-all  of  the 
man  of  business  is  often  "more  production,"  which  in  the  case  of  an 
individual  firm,  may  change  to  "sell  more."     "Stuff  the  patient,"  seems 
to  be  the  prevailing  remedy;  perhaps  a  limited  diet  would  in  the  end 
prove  the  more  sound. 


FINAL  CRITICISM  543 

tionize  marketing  or  to  affect  greatly  the  cost  of  products. 
Large  cities  and  specialized  agricultural  areas  must  draw  their 
products  from  a  wide  area.  A  relatively  small  part  of  the 
produce  consumed  can  be  grown  so  close  to  the  community 
that  the  grower  can  afford  to  bring  his  produce  to  a  public 
market.42  As  a  usual  thing  the  consumer  likewise  cannot 
afford  the  time  it  takes  to  purchase  in  this  manner.  Further- 
more, with  more  distant  producing  areas,  these  difficulties  are 
intensified.43 
It  is  likewise  true  that  great  results  cannot  be 


to  consumers  b     m^nm  ^f  the       r 


post  or  express  service.  The  advocates  of  parcel  post  have 
emphasized  the  use  to  which  this  system  can  be  put  in  elimi- 
nating middlemen  in  the  farm  market  and  making  direct  sale 
possible.  But  the  opportunities  are  limited.  Small  sales 
made  by  description  are  necessary  and  the  difficulties  are  too 
great  and  the  opportunities  for  misunderstanding  are  too  many 
to  cause  one  to  anticipate  wide  use  of  this  method.  The  par- 
cel post  and  express  are,  of  course,  widely  and  profitably  used 
in  the  delivery  of  goods  sold  through  the  usual  channels,  and 
a  large  volume  of  "mail  order"  business  in  manufactured  goods 
is  delivered  by  these  services. 

(4)  Cooperation  and  Combination  among  Competitors.  — 
Another  type  of  cooperation  among  producers  which  many 
believe  will  eliminate  excessive  costs  of  competition  is  the 
development  toward  combination  in  the  so-called  "trust  move- 
ment," 44  and,  more  recently,  the  "open  price  association." 

42  And  even  when  growers  can  haul  their  goods  to  a  city,  they  may 
prefer  to  sell  to  merchants.     See  pp.  47-54.     In   many  of  our  public 
markets  the  vendors  are  retailers  and  not  farmers.     In  other  markets 
the  farmers  sell  largely  to  retailers.     See  the  Report  of  the  Federal 
Trade  Commission  on  the   Wholesale  Marketing  oj  Food   (1920),  pp. 
48-49,  59-30. 

43  See  L.  D.  H.  Weld,  The  Marketing  oj  Farm  Products,  Chap.  XVIII. 
"See  Charles  P.  Steinmetz,  America  and  the  New  Epoch  (1916). 


544  PRINCIPLES  OF  MARKETING 

The  methods  and  purposes  of  the  trusts  as  related  to  market- 
ing are  generally  familiar.45  The  methods  used  by  such  com- 
binations would  bring  much  the  same  result  as  would  those 
fl.HvQp.fl,|.p.^  |~>y  many  socialists.  The  outstanding  difference  is 
in  the  means  of  control.  In  Tact,  certain  groups  of  socialists 
favor  the  apparent  trend  toward  combination  ansLmonopoly 
on_the  ground  that  private  enterprise  is  doing  the  very  thing^ 
that  the  socialistsjiesire.  Their^policy  is  to  let  private  enter- 
prises eliminate  excessive"*competition  and  develop  monopolies, 
and  then  when  the  process  is  complete,  to  have  the  state  step 
in  and  take  them  over.46 

One  of  the  strongest  arguments  in  favor  of  such  combina- 
tions, and  of  open  price  associations,  is  that  what  has  come 
to  be  called  "cut-throat"  pnrn  petit  inn  is  thfirpfyy  eliminated^) 
the  benefit  of  society  and  of  the  individual  firms  involved. 
But  combinations  in  so  far  as  they  prove  to  be  monopolistic  — 
and  they  are  not  fully  successful  in  controlling  competition 
unless  they  do  approach  monopoly  —  exercise  an  influence  in 
the  market  which  past  experience*  with  them  has  shown  to  be 
harmful.  It  is  essential  to  the  public  interest  that  they  be 
adequately  controlled;  otherwise  society  is  better  off  to  have 
them  destroyed.  Because  this  attitude  has  prevailed  among 
our  legislators  and  the  judiciary,  combinations  ha^ve  been 
forced  to  fight  for  legal  existence.  Tb?rp  faj  1i"'i'i  '  .....  "'i  }  /i  ^'".vy- 
ing feeling  that  perhaps  after  all  it  might  be  best  to  favor 
^uch_combinations  as  can  prove  themselves  economically  bene- 
icial  ancjto  regulate  their  fl,nt,ivitifts 


^ 
agencies.47     There  could  thus  be  combined  to  some  degree,  the 

45  See  for  example,  L.  H.  Haney,  Business  Organization  and  Combina- 
tion (1914),  J.  W.  Jenks,  The  Trust  Problem  (1907),  R.  T.  Ely,  Monop- 
olies and  Trusts  (1900),  G.  H.  Montague,  Trusts  of  Today  (1904),  W. 
M.  Collier,  The  Trusts  (1900),  and  John  Spargo,  op  cit. 

48  See,  for  example,  Edmond  Kelly,  Twentieth  Century  Socialism 
(1911),  pp.  260,  416,  428. 

47  The  passage  of  the  Webb-Pomerene  Act  legalizing  combinations  in 
export  trade  supervised  by  the  Federal  Trade  Commission,  seems  to 
be  a  step  in  this  direction. 


FINAL  CRITICISM 


545 


advantages  of  individual  enterprises  which  are  felt  to  be  so 
important  to  the  success  of  the  competitive  regime,  with  the 
elimination  of  waste  which  some  advocates  of  state  activity 
believe  would  result  from  the  adoption  of  their  system. 

Conclusion. — Some  final  suggestions  can  now  be  made.  The 
marketing  process  is  very  expensive.     In_the  case  of_co_n- 
sumptioiL-gQQds  it  probably  amounts  to  50  per  cent  or  more       / 
of  the  price  paid  by  the  consumer.     Furthermore,  the  few  facts    ^ 
at  hand  show  that  there  are  yjride  xanations  in  the  expenses 
nf  nnmpeting  fjjTns,  pflrtifiifarly  in  the  retail  field.     Such  data 


as  are  at  hand  indicate  that  for  many  retailers  there  is  grgat 
opportunity^jDJLjmprQyement?  Valuable  work  is  now  being 
done  by  educational  institutions,  manufacturers,  jobbers,  and 
by  retail  associations  in  educating  retailers  to  better  methods. 
The  larger  market  organizations  seem  to  be  operating  more 
effectively,  but  the  data  for  comparison  are  meagre.  It  is 
evident  that  what  is  needed  is  to  continue  with,  and  to  develop, 
the  work  of  the  various  agencies,  public  and  private,  which  are 
directed  toward  discovering  the  problems  of,  and  improving  the 
methods  of,  merchandising.  So  expensive  a  part  of  our  in- 
dustrial mechanism  as  the  marketing  machinery  requires  care- 
ful study.  But  it  is  an  intricate  and  delicate  .mechanism, 
and  change  should  develop  only  from  investigation  and  ex- 
perience. The  selfish  interests  of  those  most  directly  involved 
may  be  expected  to  do  much  to  improve  the  technique  of 
individual  types  of  operation.  But  even  though  one  may 
not  favor  such  drastic  proposals  as  socialism,  combination, 
or  even  cooperation,  it  seems,nevertheless,  that  governmental 
action  and  the  cooperation  of  business  men  will  continue 
to  be  essential  tools  in  lli^  TleveTopment  ofa  proper  fmiction- 
ing  between  competiri 
as  well  as  a 
extreme  competitiorTand  o 


>i 


INDEX 


Adams,  C.  A.,  398,  407 
Adams,  H.  C.,  414,  475,  480,  487 
Advertised   brands,   effect    on    re- 
tailing, 192-3 

Advertising    and    branding   stand- 
ardized goods,  403 
brings  economy  in  selling,  520-2 
by    California    Fruit    Growers' 

Exchange,  253-4 
a    cause    for    direct    marketing, 

181-2 
cost  of,  in  large  scale  retailing, 

209-10,  217;  specialties,  513 
creation  of  demand  by,  without 

lowering  prices,  445 
criticism  of,  520-2;  much  unwar- 
ranted, 520; 

by  department  stores,  222 
effect  on  size  of  stocks,  538-9 
by  the  mail  order  house,  225 
manufacturer  who  does  not  ad- 
vertise or  brand,  in  weak  posi- 
tion, 175-6 
national,  191-2 
price       maintenance       possible 

through,  448 
and     private     brand     problem, 

144-5 

relation  to  margin  of  profit,  444 
relation    to    semi-monopoly    by 

manufacturers,   419-20 
and  repeat  sales,  419-20 
makes  retail  selling  easier,  195-6 
and  retailing,  205-6 
risks  minimized  by,  355 
in  sale  of  manufactures,   129-30 
standardized  goods,  401-2,  403 
by  unit  stores,  189,  210 
Advertising  agency.  6,  163-4 
Agricultural   cooperation,  see  Co- 
operation by  farmers 
Agricultural     middlemen,     whole- 


sale, see  Farm  products,  mid- 
dlemen, wholesale 

Agricultural  wholesaling,  see 
Farm  products,  wholesaling  of 

Agriculture,  characteristics  of,  29- 
30 

Agriculture,  U.  S.  Department  of, 
86,  97,  238,  301,  479 

American  Engineering  Societies, 
Committee  on  Elimination  of 
Waste  in  Industry,  505 

American  Engineering  Standards 
Committee,  407 

American  Society  for  Testing  Ma- 
terials, standards  established 
by  the,  407 

Andrews,  F.,  306 

Anti-trust  acts,  478 

Armstrong,  Paul  S.,  251 

Arnold,  J.  J.,  346 

Assembling,  by  retailer,  185 

Assembly,  Diagram  II,  20,  17-19 
of  farm  products,  69 
by     jobber     of     manufacturers' 

market,  133-4 

by  manufacturers,  18-19,  116 
relation    of    concentration    and 

dispersion  to,  19 
See  also  Buying 

Associations  among  competing 
firms,  risks  minimized  by, 
355-6 

Assorting,  402-3 
See  also  Grading 

Atkins,  Paul  M.,  322 

Auction  Company,  farm  products. 
68-9,  87-8 

Babson,  R.  W.,  392 

Bank,  the  buyer  and  the,  345-6 

the  seller  and  the,  341-2 
Barnes,  Julius  H.,  320 


547 


548 


INDEX 


Beard,  C.  A,  479 

Belgium,    consumers'    cooperation 

in,  264 

Bexell,  J.  A.,  270 

Big    business,    public    interest    ig- 
nored by,  482-3 
unfair  methods  of,  466-72 
Bill  of  lading,  295 
Bogus  independents,  469 
Bonus     to     salesmen,     increasing 

sales  by,  445 
Book  accounts,  open;   growth   of, 

346-7 

Bowen,  J.  C.,  304,  531 
Boyle,  J.  E.,  243,  322,  362,  370,  373, 

383,  385,  393,  483 
Brace,  H.  H.,  362 
Branch  houses,  for  direct  market- 
ing,  180-1 
Branded    goods,    price-cutting    of, 

448-9 
relation  of  price-maintenance  to, 

460-1 
Branded      staples,      see      Staples, 

branded 
Branding       standardized       goods, 

403 

Brands,  manufacturer  who  does 
not  use,  in  weak  position, 
175-6 

effect  on  retailing,  192-3 
jobber,  175 
manufacturers,  relation  to  direct 

marketing,  169-170 
private,  142-5 
reduce  selling  costs,  524-6 
retail,  200-1 

Brick  and  tile  industry,  106 
Broker,  for  marketing  farm  prod- 
ucts, 85-6 
for    marketing    raw    materials, 

97-8 
of  the  manufactures  market,  116, 

159-61 

See  also  Farm  products,  middle- 
men, wholesale;   and  Middle- 
men   of    manufacturers'    mar- 
ket, wholesale 
Brokerage  fee,  on  Chicago  Board 

of  Trade,  374 

BroomhalPs,  news  agency,  387 
Bruce,  A.  A.,  477 
Bryant,  R.  C.,  92 


Building  industry,  shifting  risk  in 

the,  by  contracts,  359 
Bulk,    sale    in,    24 
Business,  relations  of  State  to,  see 

State  activities 
disputes,  settlement  of,  482-3 
policies,    importance   of   market 

news  to,  382 

volume  of,  in  relation  to  financ- 
ing, 329-30 
Bush  Terminal,  in  New  York  City, 

316 

Butler,  R.  S,  188 
Buyer,  the  bank  and  the,  345-6 
local,  52-4 

standards  and  the,  401 
traveling,  50 

Buyers,  in  large  retail  stores,  213 
Buying,  by  chain  stores,  235 

correlation  of,  with  sales,  effect 

on  financing,  331-2 
direct,  by  manufacturers,  277-8 
by   farmers'   cooperative   organ- 
izations, 243-4 
facilitated    by    standardization, 

396-7 

for  mail  order  houses,  227-8 
power  of  large  retail  organiza- 
tions, 212-5 
retail,     grown     more     difficult, 

191-2,  196-7 
and   stock-turn,  204 
weakness  of  unit  store  in,  189 
See  also  Assembly 
Buying    middlemen,    of    manufac- 
tures market,  161-2 

California  Associated  Raisin  Co., 

244 

California     Fruit     Growers'     Ex- 
change, 244,  245,  251-3 
and  the  elimination   of  middle- 
men, 288 

gathers  market  news,  394 
Canned    foods,    commission    men, 

157 

use  of  broker  in  marketing,  160 
Care  of  goods  in  storage,  316,  319 
Carload  rates,  297-300 

effect  on  financing,  332-3 
Car-lot  receivers  of  farm  products, 

78 
Cars,  private,  302 


INDEX 


549 


Cash-and-carry  system,  in  chain 
stores,  233 

Cash  discount,  the,  see  Discounts, 
cash 

Cash  payment,  reasons  for,  342-5 

Cash  sales,  by  mail  order  houses, 
226 

Cattle  industry,  commission  deal- 
ing in,  83-4 

Caveat  emptor,  Doctrine  of,  347. 
484 

Central  Live  Stock  Commission 
Co.,  The,  245 

Central  markets,  concentration  of 

storage  in,  317 

for    farm    products,    see    Farm 
products,  markets  for  central 

Central  wholesale  markets  for 
manufactures,  117-19 

Cereals,  estimated  volume  of  fu- 
ture trading  in,  374 

Chain  stores,  230-7;  advantages  of, 
232-6;  buying  by,  235;  cash- 
and-carry  system  in,  233;  con- 
solidation of,  236-7;  control 
and  ownership  of,  231-2;  cost 
of  doing  business,  233-4;  de- 
partmentization  in,  236;  give 
exclusive  agencies  in  small 
towns,  237;  future  of,  237; 
"Penny  System"  of,  237;  per- 
sonnel problems,  236;  price 
appeal  of,  233;  specialization 
in,  236;  vs.  specialty  store, 
232;  stock-turn  of,  234-5; 
superior  buying  by,  235;  vol- 
ume of  business,  231 

Chamber  of  Commerce  of  the  U. 

S.  A.,  455 

settlement  of  business  disputes 
by,  482 

Channels  of  distribution,  5 
combination   of,   131-2 
destroying  competition  by  clos- 
ing, 470-1 

fruits  and  vegetables,  59-62 
manufactures,   126-32 

Chemistry,  Bureau  of,  U.  S.,  485 
power  of,  to  enforce  Pure  Food 
and  Drug  Acts,  484-5 

Cherington,  P.  T.,  8,  11,  93,  98, 
142,  143,  149,  153,  155,  156, 
157,  158,  163,  194,  201,  277, 
334,  397,  403,  449,  463,  515 


Chewing  gum,  advertising  of,  420 

Chicago,  freight  terminals  in,  312 

map    of    South    Water    Street 

Market,  311 
underground  freight  railroad  in, 

308 

Chicago  Association  of  Commerce, 
business    disputes   settled    by, 
482 
Chicago  Board  of  Trade,  Market 

Reports  Committee,  393 
Chicago  produce  market,  64 
map  of,  311 
perishable    foods    consigned   to, 

66 

Clapp,  E.  J.,  296,  310 
Clay,  H.,  280 
Clay  beds,  control  of,  106 
Clayton  Anti-Trust  Act,  478 
Coal,  contracts  for  future  delivery 

of,  102 

transportation  rates  on,  306 
Cold  storage,  323-4 

finance  of,  349 
Collier,  W.  M.,  544 
Collins,  J.  H.,  48,  60,  86 
Combination,  and  cooperation,  by 

competitors,  543-5 
risks  minimized  by,  356 
Commerce,  Department  of,  U.  S., 

388,  479 

Commercial  paper.  348-9 
Commission  dealing,  in  farm  prod- 
ucts, 79-84 

See  also  Farm  products,  middle- 
men, wholesale 
Commission     houses,     in    foreign 

trade,  164-6 
of   manufacturers'   market,    116, 

155-6 

Commission  merchants,  see  Com- 
mission houses 
Commodities,    general,    news    of, 

391 

Communication,  and  retailing,  190 
Competition,  costs  of,  reduced  by 

recognized  standards,  523-4 
and  economic  effectiveness,  466 
evils  of,  537-40 
excessive,  illustrated  from  wheat 

and  flour  trade,  531 
excessive  costs  of,  537-8 
importance  of  market  news  to 
effective,  380-1 


550 


INDEX 


Competition,  mandatory  acts  of 
government  to  elevate  the 
plane  of,  484-7 

necessitates  excessive  stocks, 
538-9 

between  manufacturers  and  job- 
bers, effect  of  on  retail  buying, 
191 

price-cutting  caused  by,  447 

and  prices,  408-21    (Chap.  XX) 

and   quality,  539-40 

between  railways  and  water- 
ways, 294 

between  retailers,  and  the  price- 
maintenance  problem,  460-2 

risks  due  to,  353-4 

semi-monopoly  power  and,  419- 
20 

State  activities  to  elevate  the 
plane  of,  481-7,  489-90;  out- 
line of,  485-6 

unfair,  466-72;  by  closing  chan- 
nels of  distribution,  470-1;  by 
dishonest  practices,  471-2;  ef- 
forts of  trade  associations  to 
prevent,  482-4;  injurious  to 
public  welfare,  472;  methods 
of,  466-72;  by  price-cutting, 
467-70 

wastes  of,  520-3;   remedies  for, 

540-5 

Competitive  prices,  409-12 
Competitive  regime,  498-504 
Competitors,       cooperation       and 

combination  with,  543-5 
Compressing  cotton  in  transit,  304 
Concentration,  of  white  potatoes, 
47  (Map  I) 

and  dispersion,  2-3;  relation  to 
assembly,  19;  and  assembly, 
Diagram  II,  20 

facilitates  grading,  96 

of  farm  products,  39-42,  65-6,  69, 
74-5 

number  of  states  interested  in 
markets  of  16  cities,  41  (Table 
III) 

of  raw  materials,  96-7 

unimportant  with  manufactures, 
116 

of  wheat,  4 
"Consent  decree"  of  1920,  Packers', 

297-8 
Consignee,  general,  46,  48 


Consignment,      see      Commission 
houses  and  Commission  deal- 
ing 
Consolidation,     of     chain     stores, 

236-7 

Census,  Bureau  of,  U.  S.,  386,  388 
Consumer,   exercise   of   choice  by, 
effect  on  demand  creation,  13 
inability  to  judge  values,  526-7 
interest  in  marketing,  1,  2 
prefers    standardized     products, 

397 

sale  to,  127-8 
will  take  substitutes,  456 
Consumer  cooperation,  see  Coop- 
eration by  consumers 
Consumption,  effect  of  marketing 

efficiency  upon,  497-8 
effect  of  storage  on,  323-4 
Consumption    goods,    cost    of   re- 
tailing, 514-16 
consumer's    failure    to    measure 

value  of,  438-9 
determination  of  selling  price  of, 

431-2 
effect  of  freight  rates  on  price 

of,  306 
expense  of  demand  creation  for, 

borne  by  seller,  405 
interrelations  between  prices  for, 

in  various  markets,  435-6 
marketing,  123-5 
markets  for,  59-61 
no    definite    market    price    for, 

431-3 

price  in  relation  to,  123 
prices  of,  430-3 
production  of,  "for  the  market," 

124 

selling,  124-5 

service  in  relation  to,  123-4 
Consumption    wholesale    markets, 
see    Farm    products    markets, 
secondary  wholesale 
Containers,  standard,  402 
Contracts,  for  future  delivery  of 

coal,   102 
for    future    delivery,    organized 

dealing  in,  361-77 
of  purchase  and  sale,  shifting  and 
minimizing  risk  through,  358- 
61 

Convenience,  effect  on  prices,  421, 
426 


INDEX 


551 


Convenience   goods,  222-3 
Convenient  prices,  426 
Converse,  P.  D.,  235 
Cooperation,  238-70  (Chap.  XIII) 

and  combination,  by  competi- 
tors, 543-5 

cooperative  organization  laws, 
241 

by  consumers,  260-70;  in  Amer- 
ica, 268-70;  economic  aspects 
of,  265-6;  English  movement, 
260-4;  features  of,  262-8;  in- 
tegration in,  265;  "pull"  of 
consumer  replaces  "push"  of 
profit-seeking,  262-3 ;  weakness 
of,  in  America,  268-70 

by  farmers,  36,  242-60;  attitude 
of  business  men  toward,  250; 
business  relations  with  grow- 
ers, 243-4,  246-7;  causes  for 
failure  of,  258-9;  and  Clayton 
Anti-Trust  Act,  243;  cost  of 
marketing  under,  257;  federa- 
tion, 248-58  (see  also  coop- 
eration by  farmers,  whole- 
saling) ;  local  associations, 
purposes  of,  244-8;  organiza- 
tion features  of,  243-4;  rela- 
tions with  growers,  243-4, 
246-7;  results  of,  259-60;  try- 
to  secure  better  prices  for 
farmer,  246;  pooling,  243; 
social  results,  257 ;  wholesaling, 
248-58— benefits  of,  248-9;  ex- 
tent of,  249-50 

meaning  of,  238-9 

one  vote  per  member  in,  240 

patronage  dividend,  240,  241 

pay  only  interest  on  invested 
capital,  240 

as  a  remedy  for  the  wastes  of 
competition,  541-2 

sources  of  information  upon, 
238-9 

ultimate  purpose  of,  239 
Cooperative  associations,  features 
of  organization,  239-42 

brand  and  advertise  goods,  403 
Cooperative   League    of   America, 

268 
Cooperative  shipping,  53,  54.     See 

also  Cooperation  by  farmers 
Cooperative     spirit,     241-42,     267- 
268 


Cooperative  Wholesale  Society,  of 

England,  261-2 
Copeland,  M.  A.,  327 
Copeland,   M.  T,  8,  32,  94,   105, 
106,  153,  155,  160,  162,  169,  187, 
224,  278,  392 
Corn,  average  crop  in  recent  years, 

374 

Corporations,  Bureau  of,  U.  S.,  468 
Correspondence,  use  of  in  creating 

demand,  125 

Cost    of    advertising,    see    Adver- 
tising, cost  of 

Cost  of  distribution,  jobbing  low- 
ers, 141 
Cost    of    doing    business,     chain 

stores,  233-4 

department  stores,  220-2 
large  scale  retailing,  216-17,  218 

advertising  cost,  209-10 
mail  order  houses,  228-9 
overhead  expense,  in  large  scale 

retailing,  209-10 
retailing,  197-8,  199 
Cost     of    goods,    retail    mark-up 

added  to,  424-5 
Cost    of    marketing,    505-19    (Ch. 

XXV) 
cartage  costs  in  Washington,  D. 

C.,  309 

causes  of  excessive,  505 
by     cooperative     organizations, 

250,  265-7 

little  data  concerning,  507-8 
and  demand  creation,  16 
direct    marketing    by    manufac- 
turers, 178 

effect  of  speculation  on,  374-5 
excessive  selling  costs,  520-7 
farm  products,  275-7,  508-14 
fees,    of    commission    men    and 

brokers,  159 
jobbers,  149-52 
limits  market  areas,  442-3 
lowered  by  elimination  of  mid- 
dlemen, 273 
manufactures,  511-6 
and  the  middleman  system,  530 
not    lowered    when    middlemen 

are  eliminated,  182 
poorly  planned  markets  in  rela- 
tion to,  312-3 
production  goods,  518-9 
retail,  197-8,  199,  515-7 


552 


INDEX 


Cost     of     marketing,     service     is  j 

costly,  501 
specialties,  513-4 
staples,  511-3 
tendency  to  increase  with  large 

scale  production,  503-4 
transportation,  293,  305-9 
trucking,  307-9 
Cost  of  production,  and  demand 

creation,  16 

relation  to  market  price,  423 
relation  of  prices  to,  410-13 
relation  to  retail  price,  424 
relation  to  supply  and  demand, 

410-13 

varying,  and  prices,  411-13 
Cost  of  retailing,  514-16 
farm  products,  508-11 
Cost  of  selling,  excessive,  520-7 
lowered  by  advertising,  195-6 
Costs,  unit,  relation  of  to  financ- 
ing, 329-30 

Cotton,     compressing     in    transit, 
304;     concentration     at     New 
York,  70;   direct  purchase  of, 
98,    103;    financing    marketing 
of,  37,  345-6;  factor,  78;  mar- 
kets,  67;    marketing   of,   31-2, 
162-3;  warehouses  for,  320 
Cotton  industry,  hedging  in  the, 
105,   369;    localization   of,  41; 
financing  of,  334;  marketing  in 
the,  278;  integration  in,  269 
Coulter,  J.  L.,  238 
Country  general  store,  49-50,  186- 

187 

shipping  points,  see  Farm  prod- 
ucts, markets,  local 
Coyle,  W.  P.,  305 
Creation  of  demand,  see  Demand 

creation 

Credit,  banks  in  relation  to,  341- 
2;  "frozen,"  327;  granting, 
relation  of  to  financial  power, 
334;  granted  by  jobber,  135; 
jobber  helps  manufacturer 
with,  139;  means  of  extending 
for  current  financing,  336-49; 
mercantile,  337,  340-1 ;  per- 
sonal, 337,  339-40;  postponing 
payment,  336-8;  security  for, 
339-41;  types  of,  336-8;  de- 
vices, particular,  346-8;  period, 
the,  338-9 


Crises,  financial,  caused  by  lack  of 
market  news,  357 

Criticism  of  marketing  system, 
see  Marketing  system,  criti- 
cism of 

Crop  reports,  386-7 

Cross  freights,  539 

Cumberland,  W.  W.,  238,  251 

Current  financing,  see  Finance; 
Financing,  current 

Custom,  effect  on  prices,  421 

Customary  and  convenient  prices, 
426 

Cut-prices,  see  Price-cutting 

Dairy    products,    direct    sale    of, 

45-46 

Davis,  D.  G.,  246 
Day,  Clive,  32 
Dealer  cooperation,  194-5 

jobber's  attitude  toward,  176 
Delivery     of     goods,     department 

stores,  222 

Demand,  consumer,  determines  up- 
per price  limits,  422-3,  424, 
433-4 

effect  on  monopoly  price,  416-18 

increased  by,  advertising,  with- 
out lowering  price,  445;  bonus 
to  salesmen,  445;  lower  prices, 
446 

relation  to  retail  price  mark-up, 

425 
Demand  creation,  12-16 

and  agricultural  market,  38-9 

arises  from  consumers'  inability 
to  judge  values,  526-7 

effect  on  prices,  of  consumption 
goods,  430-1 ;  of  equipment, 
430-1 

importance  of,  522-3 

jobber's  service  of,  not  satis- 
factory to  manufacturer,  173-4 

methods  of,   14 

modern  emphasis  of,  14-15 

nature   of,  522-3 

need  for  in  marketing  manufac- 
tures, 112,  113-14 

reasons  for,  12-13,  15-16 

relation  to  direct  marketing, 
171 

role  of,   15-16 

in  the  sale  of  equipment,  122; 
manufactures,  125-6;  produc- 


INDEX 


553 


tion  goods,  430 ;  raw  materials, 
430 

See  also  Selling 
Demand  and  supply,  fundamental 

importance  of,  414-5 
poor  adjustment  of,  413,  499,  540 
relation  of  competitive  prices  to, 

410-13 
relation   to   cost    of  production, 

410-13 

risk  due  to  fluctuation  in,  350-4 
Demurrage  charges,  310-12 
Denver,  as  a  central  market,  294 
Department  stores,  218-23;  adver- 
tising  of,   222;    cost   of  doing 
business,  220-2;  delivery  serv- 
ice of,  222 ;  departmentization, 
disadvantages  of,  222;    origin, 
218-19;  personnel  problems  of, 
222-3;    rent,    221-2;    shopping 
conveniences  of,  219-20;  stock- 
turn  in,  516  (Table  XI) ;  vol- 
ume of  business,  219 
Departmentization,  in  chain  stores, 

236;  in  retail  stores,  205-7 
Description,  sale  by,  25;  aided  by 

standardization,    403-4 
Dewing,  A.  S.,  235,  325 
Direct  buying,  by  manufacturers, 

277-8 

Direct  marketing,  as  a  means  to 
get  jobbers  to  stock  manu- 
factures, 178-9 

disadvantages  illustrated,  179-80 

feasible,  when,  179-80 

of  manufactures,   169-84   (Chap. 

X),    278-9;     and    advertising, 

181-2;   financing  of,   178;   and 

scale     of     production,     287-8; 

tendencies  toward,  causes   of, 

169-70 ;    many    manufacturers 

fail  in,  178-9;  must  duplicate 

jobber's   service,    180-1;    often 

only  partially  utilized,  183-4; 

use  of  branch  houses,  180-1. 

Direct  sale,  of  farm  products,  43-6; 

to  manufacturers,  44 
of  fruits,  vegetables,  and  dairy 

products,  45-6 
of  machinery,  117 
of     manufactures,     125,     127-8; 
cost    of,    rs.    cost    of    selling 
through  jobber,  177-81 
Discounts,   cash,   342-4,   470;    his- 


torical, 343;  for  large  pur- 
chases, effect  on  finance,  332- 
3 ;  to  large  stores,  214-15 ;  rela- 
tion of,  to  credit  devices,  346 

Discounts,  indirect,  use  of  trading 
stamps  as,  469 

Dispersing  middlemen,  see  Farm 
products,  middlemen,  whole- 
sale; and  Middlemen  of 
manufacturers'  market,  whole- 
sale 

Dispersion,  2-3,  20  (Diagram  II) 
from  central  markets,  65-6 
of  farm  products,  42,  65-6,  69, 

75 

of  flour,  4 
relation  of,  to  assembly,  19 

Distribution,  channels  of,  5 

of       manufactures,       prevailing 

methods,  171 

State  activities  to  promote  more 
effective,   490-3 

Distributive  system,  criticism  of, 
see  Marketing  system,  criti- 
cism of 

District  jobbers,  manufactures 
market,  147-8 

Diversion  in  transit,  303-5 

Dividing  stocks,  by  jobber,  134- 
135 

Division  of  labor,  in  marketing, 
280,  284-5 

Dr.  Miles  Medical  Co.  vs.  John 
D.  Park  and  Sons  Company, 
case  of,  451-2,  464 

Drafts,  346,  348 

Drop  shipments,   140 
used  by  mail  order  houses.  227 

Duncan,  "C.  S.,  319,  383,  384,  395, 
436 

Durand,  E.  D.,  246 

Eddy,  A.  J.,  389 
Efficiency,   marketing 

elements     of,     494-504     (Chap. 

XXIV) 
State  efforts  to  promote,  490-3, 

491-2   (Outline  III) 
Elevators,  local  grain,  52-4 

hedging  by,  366-8 
terminal,  hedging  by,  362-6 

operations  of,  362-6 
Elimination   of  jobber,  by  manu- 
facturer, 140-1 


554 


INDEX 


Elimination  of  middlemen,  by 
California  Fruit  Growers'  As- 
sociation, 252-3.  See  also  Mid- 
dlemen, elimination  of 

Ely,  R.  T,  475,  544 

Emery,  H.  C.,  362 

Entrepreneurs,  risks  borne  by, 
378-9 

Equipment,  8;  marketing  of,  121- 
2;  no  definite  market  price 
for,  431-3;  prices  of,  431-3; 
specialties,  431 

Erdman,  H.  E.,  257 

Evils  of  marketing,  combated  by 
farmers'  cooperation,  256-7 

Exchange,  see  Transfer  of  title 

Exchanges,  farm  products,  68-9 
seldom  found  in  manufacturers' 

market,  119 

organized,  361-77;   functions  of, 
362 

Exclusive  agency,  the,  237 

Exclusive  dealing  contract,  470 

Expense  distribution  percentages, 
wholesale,  151 

Expense  of  marketing,  see  Cost  of 
marketing 

Expense  percentages,  wholesale, 
150  (Table  V) 

Export  merchant,  the,  166-7 

Export  markets,  67-8 

Export  trade,  cooperation  in,  168 

Express,  direct  sale  of  farm  prod- 
ucts by,  45 

direct  selling  by,  542-3 
service,   300-1 

"Eye-value,"  in  pricing,  426 

Factor,  cotton,  see  Cotton  factor 
Factor,  in  textile  trades,  155-6.  See 

also  Commission  houses 
Farm  products,  auction  companies, 

68-9,  87-8 
cattle,    commission    dealing    in, 

83-4 

classes  of  markets  for,  58-73 
commission    dealing    in,    79-84; 

rise  of  outright  purchase  from, 

81-4 
concentration      of,      39-42,      41 

(Table  III),  47  (Map  I),  74-5 
cost  of  marketing,  508-11 
cost  of  physical  distribution,  509 
cost  of  retailing,  508-9 


Farm    products,    dealers'    margins 

in,  509 

direct  sale  to  manufacturers,  44 
dispersion  of,  42,  75 
exchanges,   68-9 
functional  specialists,  88-9 
improved    through    cooperation 

by  farmers,  247-8 
interrelations  between  prices  of, 

in  various  markets,  435-6 
irregularities  in  production  and 

sale  of,  32-3 
market  news  of,  386-7 
marketing  of,  29-54  (Chap.  Ill) ; 
cooperation  by  farmers  in,  36, 
54;  contrasted  with  marketing 
manufactures,   77;    direct  sale 
in,  43-6;   effect  of  localization 
of      manufacture      on,      40-2; 
methods  of,  42-54;  variations 
in,  30-1,  42-3 

markets  for,  central,  56-8,  62-71 
characteristics  of,  64;  disper- 
sion from,  65-6;  distribution 
from,  56-9;  primary  markets, 
66-7;  receipts  and  shipments 
from,  57  (Table  IV);  ship- 
ments between,  57-8;  ship- 
ments from,  to  jobbing  mar- 
kets, 58 

Chicago  produce  markets,  64 
classes  of  markets,  58-9 
cotton,  67 
export,  67-8 
import,  68 
functions  of,  62 
jobbing,  69-71;   receipts  from 
central     markets,     58.     See 
also    Farm    products,    mar- 
kets,   secondary    wholesale, 
and  jobbing  centers 
local,  58-9,  62 
primary,  66-7 
produce,    scale    of    operations 

in,  is  small,  76 
public,  44-5 

relation  of,  to  consumption 
goods  and  raw  materials,  59- 
62 

retail,  59,  71-2 
seaboard,  67 

secondary  wholesale,  59,  69-71. 
See  also  Farm  products, 
markets,  jobbing 


INDEX 


555 


Farm  products,  markets  for,  termi- 
nal, 60 

wholesale,  55-89  (Chaps.  IV 
and  V);  facilities  of,  55-56; 
operations  in,  74-7;  produce, 
312-3 

wool,  67-8 

middlemen  who  distribute 
forwarder,  46-8 
general  consignee,  46-8 
jobber,  buys  in  central  mar- 
kets, 70 

local,    46-54;    country    general 
store,  49-50 ;  local  buyer,  52- 
4;  retail  store,  48-50;  travel- 
ing buyer,  50 
specialization  of,  by  products, 

7 

wholesale,    74-89    (Chap.    V) ; 
broker,  85-6;  car-lot  receiv- 
ers,   78;    combining    opera- 
tions   of,   75-7;    commission 
men,    78,    79-84;     confused 
nomenclature,     74;      cotton 
factor,  78,  80 ;  dispersing,  75- 
7;  functional,  78;  grain  job- 
ber,   85;    jobber,    78,    86-7; 
merchant,    78 ;    commission 
merchant,  78;  receivers,  75- 
7;    specialization    by    prod- 
ucts, 7,  77;  speculators,  88; 
wholesalers,    78 ;     wholesale 
receiver,  78-9,  84-5 
optional  uses  of,  33 
outright    purchase    of,    78;    rise 
from  commission  dealing,  81- 
84 

prices,  effect  of  optional  uses  of 
farm  products  on,  33;  closely 
follow  wholesale  prices  of,  438 
production  of,  by  scattered  pro- 
ducers, 33;  far  from  markets, 
30 

ready  for  consumption,  market- 
ing of,  59-61 
retailing  of,  see  Retailing,  farm 

products 
sale  by  farmer  to  middlemen  in 

outside  markets,  54 
seasonalness  of,  32-3;  and 
finance,  326-7;  illustrated  by 
strawberry  shipments,  34;  sea- 
sonalness of  wheat  purchases, 
35 


Farm  products,  shipment  from 
central  markets  to  jobbing 
markets,  58 

specialized  production  of,  30 
speculation  in,  75,  88 
storage  of,  32-3,  313-4,  320-1 
transportation  of,  32-3 ;  transpor- 
tation and  storage,  difficulties 
in,  32 

used  as  raw  materials,  market- 
ing of,  61-2 

variations  in  amount  and  qual- 
ity, 33 

wholesaling  of,  55-73  (Chap. 
IV);  definition,  55;  establish- 
ing business  connections  with 
growers'  market.  55;  facilities 
of  wholesale  markets,  55-6 

Farmer,  and  demand  creation,  38- 
9;  difficulties  of,  with  finance 
and  labor,  37;  aided  by  hedg- 
ing, 369-70;  cooperation  by, 
see  Cooperation  by  farmers; 
and  marketing,  difficulties,  36- 
7;  individualism  of  farmer, 
36 

Farmers'  Educational  and  Coop- 
erative Union,  245 

Federal  Reserve  Board,  348 

Federal  Reserve  Bulletin,  117 

Federal  Trade  Commission,  60, 
62,  66,  87,  92,  102,  106,  107, 
109,  116,  157,  158,  159,  160, 
180,  245,  257,  259,  301,  311,  312, 
313,  318,  321,  362,  364,  366,  372, 
374,  383,  387,  393,  394,  405, 
464,  466,  467,  468,  487,  507, 
509,  511,  528,  536,  543 
classification  of  unfair  methods 
of  competition  by,  467;  vs 
Beech-Nut  Packing  Co.,  case 
of,  452 

Federal  Trade  Commission  Act, 
478 

Federation  of  local  cooperative 
associations  of  farmers,  248- 
258 

Field,  C.  C.,  213 

Fighting  brands,  469 

Finance,  function  of,  22-3 
market,  325-49  (Chap.  XVI) 
seasonal,  325-8;  causes  of,  327-8; 
conditions    determining   funds 
needed,  328-33 


556 


INDEX 


Finance.    See  also  Financing,  and 

Financial 

Financing,  current,  meaning  of, 
325.  See  also  Finance,  Financ- 
ing. 

Financing, 
of  crops  made  safer  by  hedging, 

370 
and   farmers'   market   problems, 

37 
direct  marketing  in  relation  to, 

182-3 

the  marketing  of  cotton,  by  lo- 
cal merchants,  37 
by  middlemen,  division  of  bur- 
den   of    financing    with,    333- 
335 
power    in,    helps    retail    buyers, 

213-14 
problem  of,  in  direct  marketing, 

178 
source  of  funds,  and  means  of 

extending  credit,  336 
and  standardization,  397-8 
and  stock-turn,  335 
storage     in     relation     to,     318- 

320 

stored  goods  as  collateral,  322 
See  also  Credit,  Finance. 
Financial    obligations    to    supply 
houses,  avoided  by  cash  pay- 
ment, 344-5 

Financial   power,  and   division   of 
credit  burden,  333;   effect   on 
type  of  sale,  83 
Fisher,  J.  W.,  Jr.,  60,  86 
Fixed    prices,    see    Price-mainte- 
nance 

Flour,  dispersion  of,  4 
Flour  milling,  41 
Food,  pure,  laws,  478 
Foodstuffs,     sometimes     used     as 

raw  materials,  90 
Foods,   direct    marketing    of,    179- 
80;    marketing    through    bro- 
kers, 159-60;  perishable,  trans- 
portation  of,  301-2 
Ford,  Henry,  293 
Forecasting  the  market,  382-3 
Foreign  and  Domestic  Commerce, 
Bureau  of.  U.  S.,  387,  388,  390- 
91,  512,  532 

Foreign  trade,  middlemen  of,  164- 
68 


Foreign   Trade,   Advisers,   Bureau 

of,  U.  S.,  391 
news,  sources  of,  390-1 

Foster,  L.  G.,  246 

Francisco,  Don,  254 

Frederick,  J.  G.,  384,  527 

Frozen  credit,  meaning  of,  327 

Fruits,  channels  of  distribution  of, 
60;  cooperative  marketing  of, 
251-3;  direct  sale  of,  45;  mar- 
keting of,  59-61 ;  marketing  of, 
by  various  methods  is  com- 
mon, 42-3;  as  raw  materials, 
90;  standardization  of,  402-3 

Full  line  forcing,  470 

Functional  market  agencies,  6 

Functional      middlemen     of     ex- 
change, 6 
of    farm    products    market,    see 

Farm  products,  middlemen 
of   manufacturers'   market,    153- 
64.       See     also     Commission 
houses,    Selling    houses,    Sales 
agents,     Manufacturers'    sales 
agent,  Selling  agent,  Broker 
sale    of    manufactures    through, 
130 

Functions  of  marketing,  10-28 
(Chap.  II).  See  also  Mar- 
keting functions 

Fungible  goods,  storage  of,  321 

Future  delivery,  contracts  for,  to 
assure  supply  of  raw  mate- 
rials, 101-2 

Future  trading,  in  cereals,  volume 

of,  374 

diminishes     price     fluctuations, 
434 

"Futures,"  organized  dealing  in, 
361-77 

Garner,  J.  W.,  473 
General  consignee,  46-8 
Gentlemen's    agreement,    relation 

of    to    price-maintenance,   457 
George,  F.,  386,  387 
Good  will,  of  raw  material  supply 

houses,  assures  supply,  100 
unfair  use  of  manufacturer's  by 

price-cutters,  454-6,  462 
Goodrich  Rubber  Co.,  B.  F.,  96, 

98 

Goods,  branded,  403 
classes   of,  7-9 


INDEX 


557 


Goods,  equipment,  8 
fungible,  storage  of,  321 
for  personal  consumption,  7 
production,  8 

Government,  relation  of,  to  mar- 
keting, 473-93  (Chap.  XXIII). 
See  also  State,  relation  of,  to 
marketing 

Government  control,  of  monopoly, 

420 

regulation  and  guarantee  of 
price  and  service,  minimizes 
risks,  355 

Grades,  see  Standardization 

Grading,  27,  396;  benefits  of,  96; 
at  country  general  store,  49- 
50;  improved  by  cooperative 
movement,  247-8;  in  storage, 
316;  relation  to  standardiza- 
tion, 27,  396.  See  also  Stand- 
ardization 

Grain  jobber,  85 

Grain,  concentration  of,  70;  coop- 
erative marketing  of,  254-5; 
grading,  403;  marketing  at 
country  points,  51  (Diag. 
Ill);  marketing  of,  61-2;  con- 
tracts for  future  delivery,  364- 
8;  storage  of,  320;  warehouses 
for,  320 

Grain  elevator,  local,  52-4 

Great  Atlantic  and  Pacific  Tea 
Co.  vs.  The  Cream  of  Wheat 
Co.,  case  of,  452 

Grocery  jobbers,  148 

Growers'  local  market,  see  Farm 
products,  markets,  local 


Hagerty,  J.  E.,  337 
Haney,  L.  H.,  303,  448,  544 
Harris,   E.  P.,  238,  261,  262,  263, 

267,  533 

Hartley,  E.  F.,  309 
Harvard     University     Bureau     of 

Business    Research,    151,    172, 

180,    193,    196,    198,   220,   494, 

507,  515,  516 
Harvey,  R.  S.,  168 
Heater  cars,  302 
Hedging,      benefits      of,      369-70; 

in   the    cotton   industry,    105 ; 

by    country    elevators,    366-8 ; 

does    not    eliminate    all    risk, 


370-2;  by  manufacturers,  368- 
9;  meaning  of,  363;  of  raw 
materials,  105-6;  shifting  risk 
through,  362-77;  and  specula- 
tion, 372-7;  by  terminal  ele- 
vators, 362-5 

Heilman,  R.  E.,  444 

Hibbard,  B.  H.,  29,  238,  246,  259 

Hillquist,   Morris,  541 

Hobson,  Asher,  258 

Holmes,  G.  K,  102,  251,  324,  382 

Hoover,  H.,  505 

Hough,  B.  O.,  166 

Hoyt,  H,  528,  539 

Huckster,  The,  43 

Huebner,  G.  G,  29,  56,  59,  306 

Huebner,  S.  S.,  365 

Kurd,  C.  W.,  234 

Import  markets,  68 

Individualization  of  products,  524 

Industrial  Commission,  U.  S.,  323 

Ingersoll,  W.  H.,  205 

"Inside"  prices,  in  large  scale  re- 
tailing, 214 

Inspection,  of  goods  in  storage, 
316;  of  raw  materials,  95-6; 
of  rubber,  95-6;  sale  by,  aided 
by  standardization,  397;  of 
wheat,  95,  404.  See  also  Stand- 
ardization 

Insurance,  shifting  risks  by,  377- 
78 

International  Harvester  Co.,  107 

International  Institute  of  Agricul- 
ture, 387 

Integration,  advantages  of,  290-92 
of  large  scale  retailing  with  job- 
bing and  manufacturing,  215 
between  manufacturers,  115 
in      manufacturers'      marketing, 

146,  156-7 
in  marketing,  283-8 

Interstate  Commerce  Commission, 
295,  297,  305 

Ivey,  Paul  W.,  126,  194,  414,  426 

Jenks,  J.  W.,  16,  544 

Jesness,  0.  B.,  242,  243,  247,  260, 

265 
Jobber,  advantages  in  marketing, 

illustrated,  179-80 
brands  of,  175 
direct  purchase  by,  279 


558 


INDEX 


Jobber,  eliminated  by  large  stores, 

215 

farm  products,  70,  78,  86-7; 
source  of  products  handled, 
86-7 

grocery,  148 

local,  advantages  in  merchandis- 
ing staples,  149 
mail  order,  146 

of  manufacturers'  market,  133- 
51  (Chap.  VIII) ;  attitude 
toward  dealer  cooperation, 
176;  chief  service  to  assemble 
for  retailers,  133-4;  district, 
147-8 ;  eliminates  manufactur- 
ers, 141-5;  elimination  of,  173- 
4;  local,  149-151;  losing 
ground,  170-2;  and  manufac- 
turers' brands,  170;  national, 
147;  not  interested  in  new 
manufactured  products,  175 ; 
selling  assistance  to  retailers, 
194-5 ;  service,  172-81 ;  service 
to  manufacturer,  137-40;  serv- 
ice to  retailer,  134-7;  a 
specialist  in  distribution,  135- 
6,  137-8;  type  of  product  sold 
by,  146-7;  types  of,  146-51; 
handles  a  variety  of  products, 
138 

and  price-maintenance,  457-8 
sale  of  manufactures  to,  129-30 
sales    efforts    of,    and    manufac- 
turers' direct  marketing,  173 
special     reasons     for     assisting 
manufacturer  to  sell,  174 

Jobbing,  and  carload  rates,  298- 
300 

Jobbing  centers,  298-300.  See  also 
Farm  products,  markets,  job- 
bing 

Jobbing  markets  for  farm  prod- 
ucts, 69-71.  See  also  Farm 
products,  markets,  secondary 
wholesale;  and  Manufactures, 
markets  for,  wholesale 

Johnson,  E.  R.,  298,  301 

Jones,  Eliot,  107,  168 

Keir,  Malcolm,  91,  118 
Kelly,  E.,  541,  544 
Kerr,  W.  H.,  260,  265,  270 
Kile,  O.  M.,  254 
King,  Clyde  L.,  43 


Kniffin,  W.  H.,  337,  343 
Knight,  F.  H.,  409,  411 
Knowledge    of    the    market,    risks 
minimized  by,  356-7 

Labor  and  the  farmer's  market 
problem,  37 

Labor,   Department   of,   U.  S.,  95 

Labor  Statistics,  Bureau  of,  U.  S., 
85,  388 

Laissez  jaire  policy,  476-7 

Langston,  L.  H.,  339 

Large  scale  production,  as  a  cause 
for  demand  creation,  112;  ef- 
fect on  marketing  costs,  503-4 

Large  scale  retailing,  see  Retail- 
ing, large  scale 

"Leaders,"  using  branded,  adver- 
tised goods  as,  448-9 

Legal  status  of  open  price  asso- 
ciations, 389-90 

Leighton,  Henry,  92,  106 

Lesher,  C.  E.,  102 

Less-than-carload   rates,   297-300 

Live  stock,  cooperative  marketing 
of,  255 

Livingston,  G.  K.,  52 

Lloyd,  J.  W.,  252. 

Loans,  bank,  to  sellers,  341-2 
short  time,  326-7,  342-5 

Local  buyer,  52-5 

Local  cooperative  association  of 
farmers,  244-8 

Local  jobbers  of  the  manufactur- 
ers' market,  149-51 

Local  markets  for  farm  products, 
see  Farm  products,  markets, 
local 

Local  shippers,  see  Farm  products, 
middlemen,  local 

Local  shipping  points,  see  Farm 
products,  markets,  local 

Localization  of  manufacture,  40-3. 
See  also  Manufacture,  locali- 
zation of 

Lough,  W.  H.,  325,  326,  341 

Lumber,  91;  diversion  in  transit, 
304 

Macy  &  Co.,  R.  H,  449 
Machinery,  sale  of,  117 
McKechnie,  W.  S.,  475 
McKerron,  W.  A.,  243 


INDEX 


559 


Macklin,  T.,  29,  249,  250,  259,  409, 

413,  414,  433,  442,  515 
McNall,  P.  E.,  515 
Macpherson,  H.,  268,  270 
McPherson,  L.  G.,  301,  306,  307 
Mail  order  house,  the,  223-30;  ad- 
vertising of,  225;   buying  for, 
227-8;     carries    wide    variety 
of    merchandise,    227-8;    cash 
sales    of,   226;    cost   of   doing 
business,      228-9 ;       disadvan- 
tages of,  228-30;  guarantee  of 
goods,      226 ;       merchandising 
methods,  225-6;   price  appeal, 
227-8;  rise  of,  225;  system  in, 
228;  transportation  costs  and, 
229;    use    of    drop    shipment, 
227;  volume  of  business,  224, 
226,   227 

Mails,  the,  dissemination  of  mar- 
ket news  by,  385 
Mandatory    acts    of    government, 

479-80,  484 
Manufacture,   localization    of,   40- 

42 
Manufactured    goods,    control    of 

quality  of,  111 
control  of  volume  of,  112 
cost  of  marketing,  511-7 
easily  standardized,  402 
faith  in  producer  of,  111-2 
large  scale  production  of,  112 
market  news  of,  387-8 
marketing     of,     111-32     (Chap. 
VII) ;   changing  conditions  in 
.    the,  114-5;  tendency  to  elim- 
inate middlemen  in,  114-5 
to  be  assembled,  7,  8 
kinds  best  sold  by  jobber,  174-5 
markets,  wholesale,  for,   115-9 
need    for    demand    creation    in 

sale  of,  112-4 
semi-,  7,  8 

tendency     toward     overproduc- 
tion, 112-3 

Manufacturer  -  jobber  -  retailer  - 
consumer  channel  of  distribu- 
tion, 129-30 

Manufacturer  -  retailer  -  consumer 
channel  of  distribution,  128- 
129 

Manufacturer  -  selling-agent  -  job- 
ber -  retailer  -  consumer  chan- 
nel of  distribution,  130 


Manufacturer,  the,  argument  of, 
favoring  price-maintenance, 
454-6,  459-60 

assembly  by,  18-9 

direct  buying  by,  277-8 

"going  around"  the  jobber,  140- 
141 

hedging  by,  368-9 

helps  dealer  to  sell,  jobber's  at- 
titude, 176 

objections  to  price-cutting,  448- 
51 

and  price-maintenance,  454-6, 
463-5 

retail  price  set  by,  426-7 

status  of,  regarding  price-cutting 
and  price-maintenance,  456- 
457 

who  does  not  brand  or  advertise, 

175-6 
Manufacturer's  agent,  116 

in  foreign  trade,  167-8 
Manufacturer's  market,  the  cost  of 
direct      selling       vs.      selling 
through  jobber  in,  177-81 

direct  selling  in,   169-84    (Chap. 

X) 
Manufacturer's    sales    agent,    157- 

159 
Manufactures,  census  of,  91,  388 

central  markets  for,  develop- 
ment of,  117-9 

classes  of,  120 

channels  of  distribution  for,  126- 
32 

demand  creation  for,  125-6 

direct  sale  of,  127-8 

markets  for,  central  wholesale, 
117-8;  development  of  small 
wholesale  centers,  119 

middlemen  of  the,  115-7,  129- 
32 

services  of,  sometimes  partly 
performed  by  the  manufac- 
turer, 130-1 

wholesale,  133-68  (Chaps. 
VIII,  IX) 

commission  men,  116 

jobber,  111-32  (Chap.  VII) 
jobber's  hold  on  retailers, 
132;  manufacturer's  agent, 
116;  selling  agent,  116.  See 
also  Jobber  of  the  manufac- 
turer's market 


560 


INDEX 


Manufactures,  sale  of,  119-20; 
through  functional  middle- 
men, 130;  to  consumers,  127- 
8;  to  jobbers,  129-30;  to  re- 
tail stores,  128-9 
wholesaling  of,  economy  in,  117 

Manufacturing  progress,  and  re- 
tailing, 191-3 

Market,  definition  of  a,  3-5 
forecasting  the,   357-8,  382-3 
price  of  fundamental  interest  to, 

408-9 
world,  see  World  market 

Market  areas,  factors  which  limit, 
440-3;  relation  of  transporta- 
tion to,  296-7 

Market  centers,  and  geographical 
conditions,  293-4;  and  trans- 
portation, 294-5 

Market  conditions,  general  news 
of,  392 

Market  finance,  see  Finance,  mar- 
ket 

Market  news,  380-95  (Chap. 
XVIII) ;  cause  for  increased 
efficiency  in  marketing  farm 
products,  57-8;  control  of,  392- 
4;  dissemination  of,  385-6; 
and  diversion  of  cars  in 
transit,  303;  effect  on  price, 
413;  importance  of,  380-81, 
395;  inadequate,  cause  for 
business  failures,  380-81 ;  in- 
terpretation of,  383-4;  mini- 
mizes risk,  351-2,  356-7;  pri- 
vate collection  of  vs.  collec- 
tion by  the  government  and 
by  trade  associations,  394-5; 
problems  arising  from  inade- 
quate, 381-2;  relation  to  spec- 
ulative price,  415;  sources  of, 
384-92;  timeliness  of,  impor- 
tance of,  383,  394 

Market  price,  see  Price,  market 

Market  risk,  see  Risk 

Market  wastes,  499-500 

Marketing,  conflicting  interests,  2 
cost  of,  see  Cost  of  marketing 
criticism  of,  conclusions,  545 
definition  of,  1 

determining  conditions  of  mod- 
ern, 502-4 

different  interests  in,  1 
groups  involved  in,   1 


Marketing,  by  manufacturers,  va- 
riety of  methods  used, 
171 

efficiency  of,  components  of, 
495-6;  effects  of,  upon  produc- 
tion and  consumption,  497-8; 
elements  of,  494-504  (Chap. 
XXIV) ;  investigation  of, 
from  private  point  of  view, 
494-5;  investigation  of,  from 
public  point  of  view,  494-5; 
technical  problems  of,  496-7 
need  for,  1 

Marketing  farm  products,  methods 
of,  42-54 

Marketing  functions,  the,  10-28 
(Chap.  II)  cost  of  performing, 
data  lacking  concerning  the, 
505 

division  of  between  manufactur- 
er and  jobber,  140-41 
outlined,    facing  p.  27   (Outline 
III) 

Marketing  system,  criticism  of, 
498-504,  520-45  (Chap. 
XXVI) ;  lack  of  accurate  in- 
formation for  criticism,  494 

Markets,     public,     direct     selling 

through,  542-3 

interrelations  of  prices  between, 
435-6 

Markets  and  Crop  Estimates, 
Bureau  of,  U.  S.,  242,  250,  386- 
7,  400,  401,  495 

Marshall,  Alfred,  208,  209,  218, 
221,  409 

Marshall,  L.  C.,  475,  479 

Marshall  Field,  200 

Marshall  Field  &  Co.,  211 

Maxwell,  William,  267-8 

Meat  packers,  and  direct  market- 
ing, 179-80 

Merchant-converter,    the,    162-3 

Merchants,  5;  market  risk  borne 
by,  360-1;  of  raw  materials 
market,  97-8.  See  also  Farm 
products,  middlemen;  Middle- 
men of  manufacturer's  market 

Merriam,  C.  E.,  476 

Merritt,  E.  B.,  182 

Michigan  Potato  Growers'  Ex- 
change, 251 

Middleman  system  and  market- 
ing costs,  530 


INDEX 


561 


Middlemen,  are  there  too  many? 
272-3,  530-37 

buying,  161-2 

classes  of,  5-7 

concentrating,  6-7 

dispersing,  6-7 

division  of  burden  of  finance 
with,  333-5 

elimination  of.  156-7,  173-4,  271- 
92  (Chap.  XIV);  in  agricul- 
tural market,  275-7;  argu- 
ments for,  273,  280-1;  condi- 
tions which  make  it  feasible, 
286-7;  by  direct  marketing  of 
manufactured  products,  278-9; 
does  not  eliminate  need  to 
perform  marketing  functions, 
280-81;  effect  of  industrial 
conditions  on,  285-6;  impor- 
tance of  individual  ability  to, 
288-9;  by  manufacturers/ 182- 
4,  277-9 ;  nature  of  problem  of, 
272-3;  by  other  middlemen, 
279;  who  can  eliminate? 
274-5;  who  profits  by?  282-3 

of  foreign  trade,  164-8 

functional,  of  exchange,  6;  of 
the  manufacturers'  market. 
153-64.  See  also  Functional 
middlemen  of  the  manufac- 
turers' market 

interest  of,  in  marketing,  1,  2 

of  manufacturers'  market,  115- 
17,  128-32 

market  risk  borne  by,  360-61 

need  for,  292 

and  price-maintenance,  457-8 

profiteering  by,  537 

of  raw  materials  market,  97-99 

specialization  of,  by  products, 
6-7.  See  also  Farm  products, 
middlemen ;  Middlemen  of 
the  manufacturer's  market; 
and  Foreign  trade.  Middlemen 

wholesale.  133-52   (Chap.  VIII), 
153-68   (Chap.  IX).    See  also 
Jobber  of  manufacturers'  mar- 
ket;   and    Functional   middle- 
men of  manufacturers'  market 
Milling  in  transit.  303-4 
Mitchell,  W.  C.,  429,  540 
Money,  is  standardized,  404-5 
Monopoly,  effect  on  price,  416-20; 
government  control  and  oper- 


ation of,  420;  price  (see  Price, 
monopoly) ;  relation  of,  to 
control  of  raw  material  sup- 
plies, 106;  retail,  fostered 
by  price-maintenance,  458-9 ; 
state  control  of,  487-90;  out- 
line of  acts  to  control,  488 

Montague,  G.  EL,  544 

Montgomery  Ward  &  Co.,  224,  225 

Monthly  Survey  of  Current  Busi- 
ness, 388 

Motor  truck,  46 

Moulton,  H.  G.,  325,  347,  348 

Mudgett,  Bruce  D.,  387 

Murchison,  C.  T,  452,  455,  457 

National  jobbers  of  manufactur- 
ers' market,  147 

National  Live  Stock  Producers' 
Association,  245,  255 

National  Retail  Dry  Goods  Asso- 
ciation, 514,  516 

Bureau  of  Research  and  Infor- 
mation, 217,  220 

Naylor,  E.  H.,  389,  390 

New  England,  receives  farm  prod- 
ucts from  various  sources,  40 

New  York,  as  a  central  market  for 
manufacturers,  118;  produce 
market,  40;  receives  farm 
products  from  various  sources, 
40 

News,  market;  see  Market  news 

Nixon,  R.  L.,  318 

Normal  price;  see  Price,  normal 

Northwestern  University.  Bureau 
of  Business  Research,  189,  199, 
205.  206,  221,  494,  507,  515, 
516 

Notes,  promissory,  346-7 

Notz,  W.  T.,  168 

Nourse.  E.  G.,  11.  29,  59.  64.  76, 
87,  280,  301,  313,  321,  324,  509, 
510,  511,  535 

Nystrom,  P.  H.,  171,  187,  188,  210, 
220,  221,  224,  228,  280,  502, 
533,  535 

Oliphant,  H.  £.,  479 
One-price  policy.  399.  431-2 
One-price  system,  in  retail  trade, 

424 
Open  book  accounts,  Growth  of, 

346-7 


562 


INDEX 


Open   price  associations,   389-90 

"Orderly"  marketing  and  "stabil- 
ization"' of  price,  257-8 

Orth,  S.  P.,  475 

Outright  purchase,  the  wholesale 
receiver,  84-5 

Overproduction,  499;  definition  of, 
113;  and  demand  creation,  13, 
15;  effect  of  on  financing,  335 

Packaged  goods,  193 

Packers'  "consent  decree"  of  1920, 
298 

Parcel  post,  301 
direct  sale  by,  542-3 
direct  sale  of  farm  products  by, 
46 

Parlin,  C.  C.,  12,  139-40,  148,  151, 
191,  219,  223,  299 

Penny  system  of  chain  stores. 
237 

Perishable  foods,  and  direct  mar- 
keting, 172;  diversion  in  transit, 
303;  fast  freight  lines  for,  302; 
limited  market  area  for,  442; 
marketing  of,  30-31;  need  for 
market  news  in  marketing, 
381-2;  storage  of,  323-4;  trans- 
portation of,  301-2 

Personal  salesmanship,  125 

Personnel  problems,  chain  stores, 

236 
department  stores,   222-3 

Philadelphia  Commercial  Museum, 
301 

Philadelphia,  wholesale  market  of, 
58 

Physical       distribution,       293-324 
(Chap.  XV) ;  aided  by  standard- 
ization, 398;   and  direct  mar- 
keting, 171-2 

Pipe  lines,  302 

Plehn,  C.  C.,  254 

Pooling,  meaning  of,  243 

Pope,  J.  E.,  37,  373 

Potatoes,  concentration  of,  47 

Powell,  G.  H.,  238 

Pratt,  E.  E.,  168 

Preparation  of  goods  for  market, 
time  of,  relation  to  financing, 
330-31 

Press,  the,  dissemination  of  mar- 
ket news  by,  385 

Price,  H.  B.,  398 


Price   (and  Prices) 

and  competition,  408-21    (Chap. 

XX)    ' 
-4  agreements,  retail,  427 

appeal,  of  chain  stores,  233;  of 
mail  order  houses,  227-8 

competitive,  409-13 

constantly  on  trial  in  market, 
445 

of  consumption  goods,  430-34 

definition  of,  409 

effect  of  false  market  news  on, 
393 

effect    of   freight   rates    on,    306 

effect  of  market  news  on,  380 

effect  of  speculation  on,  374-5 

of   equipment,   431-3 

evolution  of  a,  429 

fluctuations  in,  risks  due  to, 
350 

following  competitor's,  427-8 

of  fundamental  interest  in  the 
market,  408-9 

high,  and  price-maintenance, 
462-3 

"inside,"  214 

interrelations  of,  in  various  mar- 
kets, 435-6 

limits  to,  429-30 

lowered,  increasing  demand 
through,  446 

manipulation  of  pr.ce  by  spec- 
ulation, 376-7 

market,  413-14,  422-46  (Chap. 
XXI) ;  advance  determination 
of,  443-5;  consumer's  inability 
to  compare  qualities,  433; 
fluctuations  in,  434;  limits  to, 
422-3,  435;  price  basis,  432-3; 
quality  and  price  basis,  432-3; 
quality  basis,  432-3;  relation 
of  cost  of  production  to,  423; 
relation  to  normal  price,  422; 
varying  conditions  operating 
on,  422;  varying  reactions  of 
consumers  to  identical  goods, 
433 

at  market  minus,  432-r3 

at  market  par,  432-3 

at  market  plus,  432-3 
/monopoly,    416-20;    affected   by 
elasticity  or  inelasticity  of  de- 
mand,    416-17;      determining, 
418-19 


INDEX 


563 


Price  (and  Prices),  normal,  414- 
15;  causes  for  variation  of 
market  price  from,  413,  415- 
21;  relation  to  market  price, 
422 

one  price  system,  in  retail  trade, 
424 

producers'  share  in,  499 

of  production  goods,  430;  effect 
of  transportation  rates  on,  306 

retail,  423-8;  custom  and  con- 
venience important  in  de- 
termining, 421 ;  customary  and 
convenient,  426 ;  determina- 
tion of,  424-8,  436-40;  deter- 
mines upper  limits  to  prices  at 
preceding  points,  424;  effect 
of  transportation  costs  on,  306- 
7;  estimating  the  proper,  426; 
evolution  of,  429;  following 
competitor's,  427-8 ;  the 
"mark-up,"  424-6;  one-price 
plan,  199-200;  reasons  for  fre- 
quent fluctuations  in,  436-8; 
relation  to  stock-turn,  203-4; 
relation  to  wholesale  price, 
439-40;  suggested  by  manu- 
facturer, 426-7;  upper  limit  to 
other  prices,  423-4; 

semi-monopoly,  419-20 

speculative,  415-16 

and  stock-turn,  in  retail  stores, 
203 

"stabilization"  of,  through 
"orderly"  marketing,  257-8 

standardized,  399 

State  activities  affecting,  outline 
of,  480 

storage  in  relation  to,  322-3 

types  of,  413-14 

variations  in  effect  on  financing, 
333 

varied  to  appeal  to  different 
classes  of  buyers,  445 

wholesale,  effect  of  transporta- 
tion rates  on,  306-7;  impor- 
tance of,  439-40;  relation  to 
retail  price,  439-40;  variations 
in,  438-9;  for  staples,  440-43; 
by  big  business,  467-72 
Price  agreements,  389-90,  427; 

legality  of,  484;  retail,  427 
Price-cutting,   below  cost  of   pro- 
duction, 468;   evils  of,  454-62, 


464 ;  lowering  quality  to  avoid, 
448;  lowers  profits,  455; 
methods  of,  which  are  "un- 
fair," 467-70;  objections  of 
manufacturers  to,  448-51 ;  rem- 
edies for,  447-8 ;  result  of  com- 
petition, 447.  See  also  Price- 
maintenance 

Price-maintenance,  447-66 ;  argu- 
ments of  manufacturer  for, 
-  454-6,  459-60;  definition  of, 
451 ;  and  efficiency,  462-3 ;  and 
high  prices,  462-3;  legal  status 
of,  451-4,  464-6;  and  the 
manufacturer,  465 ;  manufac- 
turer's dilemma,  463-4;  and 
middlemen,  457-8;  and  the 
public,  459-62;  problem  of, 
451;  retail  monopoly  fostered 
by,  458-9.  See  also  Price- 
cutting 

Price  policy,  of  consumers'  coop- 
erative organizations,  263 
Price  practices,  unfair,  467-70 
Price  setting,  no  beginning  or  end 

to  process  of,  429 

Price  system,  effectiveness  of,  un- 
der competitive  regime,  500-1 
Private    brand    problem,    jobber's 

point  of  view  of,  142-6 
Produce    markets,    congestion    in, 
311-3;    New    York,    40;    poor 
location    of,    312;    sources    of 
information  on,  387 
Producer,  attitude  toward  elimin- 
ation of  middlemen,  285 
interest  in  marketing,  1-2 
Production,    correlation    of,    with 
sales,    effect    of   on   financing, 
331-2 

cost  of,  see  Cost  of  production 
effect     of    marketing    efficiency 

upon,  497-8 

effect  of  storage  on,  323-4 
large  scale,  in  relation  to  need 

for  marketing,   1,   534 
modern     methods     of,     require 
more     marketing     machinery, 
534 
roundabout,     influence     of     on 

risk,  352-3 

scale  of,  and  prices,  408 
seasonal,  effect  on  financing,  331 
specialized,  of  farm  products,  30 


564 


INDEX 


Production  goods,  8;  cost  of  mar- 
keting, 517-9;  demand  crea- 
tion in  the  sale  of,  430;  effect 
of  freight  rates  upon  prices  of, 
306;  prices  of,  430 
Products,  attributes  of,  difficult  to 

standardize,  407 
individualization  of,  524 
Profit,     dealers'    margins    of,     on 

produce,  509- 

effect  of  price-cutting  on,  445 
margin  of,  relation  of  price  to, 

408-9 

middleman's,  not  excessive,  177-8 
retail,    margins    of.    515    (Table 

IX) 

speculative,  365-6 
trade,  365-6 
wholesale  middlemen's,  margins 

of,  518  (Table  XII) 
Profiteering,  by  middlemen,  288-9, 

537 
not     confined     to     middlemen, 

537 

Promissory  notes,  346-7 
Psychical  element  in  sales,  529-30 
Public   markets,   see    Farm    prod- 
ucts, markets,  public 
Purchase  and  sale,  terms  of,  effect 

on  financing,  332-3 
Purchases,  return  of,  in  large  de- 
partment stores,  218 
women's,    are    of    two    classes, 

222-3 

Purchasing,  see  Buying 
Pure  food  laws,  478 
Pure  Food  and  Drug  Act,  480 

Quality,  and  competition,  539-40 

lowering,  to  avoid  price-cutting, 
448 

not  insured  by  competition,  539- 
40 

outline  of  state  activities  affect- 
ing, 481 

standards  of,  difficult  to  estab- 
lish, 405-7 

Rae,  John,  476 

Rates,  carload,  297-300 
and  jobbing,  298-300 
less-than-carload,   297-300 
storage,  control  of,  321-2 


Raw  materials,  7,  8,  90-110  (Chap. 

VI) 

brokers,  used  in  marketing,  97-8 
cannot  be  closely  graded,  404 
concentration  of,  96-7 
contracts  for  future  delivery  of, 

100-102 
control  of  sources  of  supply  of, 

106-9 
demand  creation  in  the  sale  of, 

430 

future   contracts   for,   disadvan- 
tages of,  103-5 
grading  of,  benefits  of,  96 
hedging  and  supply  of,  105-6 
importance  of  middlemen,  97 
indirect  control  of  supply,  pipe 

lines,  108-9 
inspection  of,  95-6 
markets,  59-62 
merchants,  97-8 
methods  of  assuring  a  supply  of, 

99-109 

middlemen  are  valuable  to  mar- 
keting of,  278 
need   for  a.  continuous   assured 

supply  of,  99 
need  for  standardization  of,  93- 

96 
purchase  of,  in  open  market,  99- 

101;  season's  supply,  102-6 
and    secondary    wholesale    mar- 
kets, 69-70 

small  scale  production  of,  90-91 
stocks,  reasons  for  carrying  large, 

103 

storage  of,  313-4 
supply    of,     manufacturers    use 
various     methods    to    assure, 
110 

transportation  of,  91-3 
Receiving    middlemen,    see    Farm 
products,    middlemen,    whole- 
sale 

Refrigeration  in  transit,  301-2 
"Regular"  dealers,  470-1 
Rent,  department  store,  221-2 
"Repeat"  sales,  419-20 
Resale    contracts,   legalization   of, 

453 
Resale      price-maintenance,      see 

Price-maintenance 
Retail  distribution,  see  Retailing 
Retail  price,  see  Price,  Retail 


INDEX 


565 


Retail   Research  Association,  218, 

220 

Retail  stores,  see  Retailing 
Retailing,  185-237  (Chaps.  Xi  and 
XII) 

advantages  of  small  vs.  large 
stores,  535-6 

and    advertising,    195-6,    205-6 

assistance  from  manufacturers, 
194-5 

bases  of  competition,  198 

buying  for  retail  stores,  193-4, 
204,  212-15;  grown  more  diffi- 
cult, 191-2,  196-7 

and  communication,  190 

cost  of,  197-8,  199,  514-15 

country  general  store,  49-50; 
186-7 

departmentization  of  retail 
stores,  205-7 

elaboration  of  service,  198-9 

farm  products,  71-2;  cost  of  re- 
tailing, 508-9;  sale  of  to  re- 
tail stores,  48-50;  difficulties 
involved  in,  48 

grown  more  difficult,  192 

inefficiency  of,  197-8 

large  scale,  208-37  (Chap.  XII) ; 
adequate  stocks,  211-12;  ad- 
vantages of,  208-16;  advan- 
tages vary  as  between  types, 
215-16;  advertising,  cost  of, 
217;  buying  power,  212-15; 
chain  store,  230-7,  see  also 
Chain  store,  the;  cost  of  ad- 
vertising, 209-10 ;  cost  of  doing 
business,  216-18;  cost  of  get- 
ting business,  217;  costs  of, 
overhead  expense,  209-10;  de- 
partment store,  218-23,  see 
also  Department  store,  the; 
disadvantages  of,  216-18;  do 
own  jobbing,  215-16;  integra- 
tion with  jobbing  and  manu- 
facturing, 215;  mail  order 
house,  223-30.  See  also  Mail 
order  house,  the;  service  in, 
2"!  1-12;  specialization,  208-9; 
stock-turn,  210-11;  volume  of 
purchases,  213 

mail  order  house  preferred  by 
some  housewives,  189 

and  manufacturing  progress,  191- 
93 


Retailing,      margins,      509;      Ta- 
ble    IX,     515;     largest,     518 

methods  and  policies  of  retail 
stores,  198-200 

private  brands,  200-201 

return   privilege,   200 

relation  of  number  of  stores 
to  volume  of  business,  533- 
34 

sale  by  manufacturers  to  retail 
stores,  128-9 

self-serve  store,  233 

service  of,  185-6,  198-9;  tend- 
ency toward  better,  195 

solicitation  in  stores,  200 

stock-turn  of  retail  stores,  201-5, 
210-11,  516 

too  many  stores,  533-4 

and  transportation,  190 

types  of  retail  stores,  186-90 

unit  stores,  187-90.  See  also 
Unit  store,  the 

use  of  advertising  in,  205-6 

who  bears  excessive   cost  of   ?, 

534-5 
Returned    goods    in    large    retail 

stores,  218 

Ries,  Heinrich,  92,  106 
Rindsfoos,  C.  S.,  90 
Ripley,  W.  J.,  306,  490 
Risk,  23,  350-79   (Chap.  XVII) 

as  a  cause  for  outright  purchase 
of  farm  products,  81-2 

division  of  burden  of  with  mid- 
dlemen, 333-5 

due  to,  competition,  353-4;  hu- 
man causes,  354;  natural 
causes,  354;  price  fluctuations 
and,  350 

minimizing,  methods  for,  354- 
79;  by  contracts,  359-61 

of  producers  greater  than  of  mid- 
dlemen, 288 

place,  351-2 

relation  of  storage  to,  318-20 

residual,  361 

shifting,  357-79;  by  contracts, 
358-9;  by  insurance,  377-8 

and  stock-turn,  205 

time,  350-51,  352-3 
Risk  -  taking,     function     of,     see 

Risk 

Rochdale     Society    of     Equitable 
Pioneers,  260-1 


566 


INDEX 


Rubber,  98 

inspection   of,   95-6 
Ruggles,  C.  O.,  310 

St.  Louis,  as  a  market  city,  294 
Sale,  bases  of,  24-6 
in  bulk,  24 
by  description,  25 

aided  by  standardization,  403-4 
by  manufacturers,  to  consumers, 
127-8;    to   jobbers,   129-30;   to 
retail  stores,  128-9 
methods  of,  outline  of,  26 
and  purchase,  terms  of,  effect  on 

financing,  332-3 
by  sample,  24-5 
by  sample  and  inspection,  aided 

by  standardization,  397 
Sales,  correlation  of  with  produc- 
tion, effect  on  financing,  331-2 
increased  by  bonus  to  salesmen, 

445 

"repeat,"  419-20 
retail,     increasing     demand     by 

lowering  prices,  446 
seasonal,  449 ;  effect  on  financing, 

331 

Sales  agent,  manufacturer's,  157-9 
Sales  efforts,  risks  minimized  by, 

355-6 

Sales  promotion  agency,  163-4 
Salesmanship,  125 
cost  of   vs.  cost   of   advertising, 

520-2 

Salesmen,  and  standardized  prod- 
ucts, 401-2 

Sammons,  Wheeler,  217 
Sample,  sale  by,  24-5;    aided  by 

standardization,  397 
use  of,  as  a  method  of  demand 

creation,  125 
Samson,  H.  W.,  406 
Seaboard  markets,  67-8 
Sears,  Roebuck  &  Co.,  224,  226 
Seasonal  finance,  see  Finance,  sea- 
sonal 

Seasonal    goods,    storage    in   rela- 
tion to,  322-3 
Seasonal     production,     effect     on 

financing,  331 
Seasonal  sales,  effect  on  financing, 

331 ;  at  retail,  449 
Seasonalness,    of    farm    products, 
32-5;    of    grain    purchases,    35 


(Table   II) ;    strawberry   ship- 
ping seasons,  34  (Table  I) ;  of 
wheat  purchases,  35 
Secondary  wholesale  markets,  see 
Farm        products,       markets, 
secondary  wholesale 
Secrist,  H.,  384 
Seeds,  K.  B.,  52 
Self-serve  store,  233 
Selling,  facilitated  by  standardiza- 
tion, 396-8 

financed  by  banks,  341-5 
mass  methods  of,  call  for  stand- 
ardization, 401-2 
psychical  elements  in,  529-30 
State    activities    affecting,    out- 
line of,  480 

See  also  Demand  creation 
Selling   agents,    for    manufactures, 

116,  157-9 

Selling  costs,  excessive,  520-7 
Selling  effort  of  jobber,  not  sat- 
isfactory     to      manufacturer, 
173-4 
Selling    house    of    manufacturers' 

market,  130,  155-7 
Semi-manufactured  products,  mar- 
keting of,  120-1 
Semi-monopoly  price,  419-20 
Semple,  Ellen  C.,  30,  63,  294 
Service,  is  costly,  501-2 
importance  of,  283,  501-2 
large  scale  retail,  211-2 
of  middlemen,  283 
not  well  done  for  manufactures 

by  middlemen,  286 
retail,  185-6,  195,  197-9 
standardized,  398-9 
state  activities  affecting,  outline 

of,  480 

storage,  nature  of,  315-16 
Shaw,  A.  W.,  -6,   11,   13,   24,   185, 

272,  274,  432,  525,  526 
Shaw,  A.  W.,  Co.,  136,  150,  536 
Sherman,  W.  A.,  60,  86 
Sherman  Anti-Trust  Act,  478,  488- 

89 

Shifting  risk,  see  Risk,  shifting 
Shippers'  representative,  85 
Shopping  goods,  222-3 
Shopping  conveniences  of  depart- 
ment  stores,   219-20 
Simmons,  E.  C.,  180 
Skelton,  O.  D.,  476,  541 


INDEX 


567 


Slichter,  S.  H,  452 
Small     scale     industry,     predomi- 
nates in  agriculture,  29-30 
Small    scale    production    of    raw 

materials,  90-1 
Smith,  Adam,  475,  476 
Smith,  J.  R.,  57,  108 
Socialism,  as  a  remedy  for  wastes 

of  competition,  540-1 
Sonnichsen,  A.,  238 
South  Water  Street, -Chicago,  Map 

of,  311 

Spargo,  John,  476,  541,  544 
Specialization,    as    an   explanation 

of  middlemen,  290 
in  chain  stores,  236 
control  of,  in  marketing,  283-5 
divides    style    and    credit   risks, 

162-3 

in  large  scale  retailing,  208-9 
in  marketing,  284-5 
and  need  for  marketing,  1 
Specialized    production    of    farm 

products,  30 
Specialties,  12,  39,  122 
cost  of  advertising,  513 
cost  of  marketing,  513-5 
not   well  sold  by  jobbers,   170, 

176-7 

prices  of,  431 
and  direct  sale,  171 
Specialty    stores,     see     Retailing, 

unit  stores 
Speculation,  372-7 
effect  on  prices,  374-5 
evils  of,  375-7 
in  farm  products,  88 
and  hedging,  372-4 
manipulation  of  prices  in,  376-7 
Speculative  prices,  415-6 
Speculative  profit,  365-6 
Spence,  W.  H.,  452. 
"Spread,"  between  prices,  282 
between  producer  and  consumer 
prices,   causes   for  large,   499- 
500 

Standard  containers,  402 
Standard  Oil  Co.,  108-9 
Standardization,       23-7,       396-407 
(Chap.    XIX)     aids    physical 
supply,  .398 

grading  in  storage,  316 
importance  of,  to  improved  mar- 
keting, 396,  527-9 


Standardization,   lack   of,   539 
makes  exchange  easier,  396-8 
and  mass  selling  methods,  401- 

402 

merchandising  demand  for,  94 
methods  of,  402-3 
of  methods,  in  chain  stores,  234 
nature   of,  26-7 
near  source,  is  desirable,  405 
of  raw  materials,  need  for,  93- 

96 

by  State  and  federal  laws,  406 
Standardized  goods, 
advertising,  403 
branding,  403 
Standardized    materials,    need    of 

manufacturers  for,  93-6 
Standards,  bases  for,  398-400 
Bureau  of,  U.  S.,  388,  400 
effect    of    lack    of,    on    market 

price,  433 
governmental,  400 
need  for,  404 
now  established,  406-7 
of  quality,  difficult  to  establish, 

405-7 
reduce  costs  of  competition,  523- 

24 
responsibility  for  observance  of, 

400-1 
set    to    accord    with    needs    of 

buyers,  401 
Staples,  39 

best  sold  by  jobber,  176-7 
branding,  control  of  the  market 

by,  524-6 

branded,  excessive  demand  crea- 
tion for.  526 

cost  of  marketing,  512-13 
cost  of  retailing,  514-15 
price  agreements  in  sale  of,  427 
reducing       price       competition 

through,  524-6 
sale  of,  at  retail,  425 
well  marketed,  by  local  jobbers, 

149-51 
world   market   and   world   price 

for,  440-2 
State  activities,  which  affect  basis 

of  sales  argument,  outline  of, 

480 

affecting  marketing,  480-93 
conflict  of  interest,  474-5 
to  control  monopoly,  487-90 


568 


INDEX 


State  activities,  to  elevate  the 
plane  of  competition,  481-7, 
489-90;  justification  for,  486- 
7;  outline  of,  485-6;  preven- 
tative  power  of,  486-7 

extreme  interference,  477 

laissez  jaire  policy  toward,  476- 
77 

to  make  distribution  more  ef- 
fective, 490-3 

natural  but  not  necessary,  473-4 

necessary,  473 

neither  necessary  nor  natural, 
but  often  exercised,  473-4 

types  of,  473-4 

State,  mandatory  acts  to  elevate 
the  plane  of  competition,  479- 
80,  484-7 

regulation  of  business  by,  nega- 
tive activities,  478;  manda- 
tory activities,  479-80,  484-7; 
promotive  activities,  479 

relation  of,  to  business,  477-80 

relation   of,  to  marketing,  473- 

93  (Chap.  XXIII) 
State  control,  development  of  dur- 
ing   World    War,    474-5.     See 
also  State  activities 
Steel  industry,  integration  in,  108 
Steinmetz,  C.  P.,  501,  533,  543 
Stevens,  W.  H.  S.,  468 
Stevens  Bill,  453,  466 
Stock  trains,  302 

Stocks,  better  selected  in  large 
stores,  214-5 

excessive,  as  weakness  of  mar- 
keting, 538-9 

retail,  194 

Stock-turn,  advantages  of  a  rapid, 
204-5 

barometer  of  good  merchandis- 
ing, 202 

in  chain  stores,  234-5 

in  department  stores,  516 

and  finance,  335 

of  jobber,  lowered  by  small 
sales  to  retailers,  136-7 

in  large  scale  retailing,  210-1 

means  of  stimulating,  203-4 

results  of  rapid,  illustrated,  202- 
203 

retail,  201-5,  210-11;  annual 
rates,  516  (Table  X)  how  to 
figure,  201-2 


Stock-turn,  wholesale,  rate  of,  518 

(Table  XIII) 
Storage,  313-24 

care  of  goods  in,  316,  319 
causes  for,  314-15 
concentration  of,  in  central  mar- 
kets, 317 

control  of  facilities  for,  320-2 
of  farm  products,  32-3 
function  of,  19-22,  313-15 
jobber's  service  in,  139 
kinds  of,  315 

nature  of  service  of,  315-16 
need  for,  313 

need  for  finance  in,  318-20 
place  of,  317 

relation  of  prices  to,  322-3 
in  transit,  295,  303-4 
Style  changes,  frequent,  529 
Style  goods,  sale  of  at  retail,  425; 

seasonal  prices  for,  444-5 
Substitutes,    willingness    of    con- 
sumers to  take,  456 
Sugar     factories,     contracts     with 

farmers,  102 
Sugar  beets,  41 

Supplies,  7,  8;  marketing  of,  121-2 
Supply  and  demand,  see  Demand 

and  supply 

Surplus,  use  of  by  consumers'  co- 
operative  organizations,  264-5 
Swanson,  A.  E.,  90,  100 
Swanson,  W.  I.,  384 
Swift  and  Co.,  512 

Taking  care  of  one's  customers, 
100 

Tariff  Commission,  U.  S.,  442 

Tariffs,  foreign,  information  con- 
cerning, 391 

Taussig,  F.  W.,  423,  424,  435,  468 

Telegraph  and  telephone,  dissem- 
ination of  market  news  by, 
385-6 

Terminal  elevators,  see  Elevators, 
terminal 

Terminal  markets  for  farm  prod- 
ucts, see  Farm  products,  mar- 
kets, terminal 

Terminals,  Chicago,  312 
congestion  in,  312-13 
handling  products  at,  309-10 

Thompson,  W.  B.,  318 

Tosdal,  H.  R,  389,  451,  452 


INDEX 


569 


Tower,   W.  S.,  109 
Track  storage  charges,  312 
Trade  associations,  efforts  to  pre- 
vent unfair  competition,  482-4 

efforts  to  promote  marketing  ef- 
ficiency, 492-3 

market  news,  collected  by,  388-9 

risks   sometimes  minimized   by, 

356 

Trade    papers,    dissemination    of 
market  news  by,  385;   market 
news  collected  by,  388-9 
Trade  profit,  365-6 
Trading  stamps,  469 
Transfer    of    title,    facilitated    by 
central    markets,   65;    concen- 
tration   and    dispersion,    and, 
2,  3;  standardization  and,  396- 
98 

Transfer   of   title,   "repeat"   sales, 
419-20 

saving   in   number    of,    through 
elimination  of  middlemen,  291 
Transit  privileges,  294,  303-5 
Transportation,   293,   313 

cartage  costs  in  Washington,  D. 
C.,  309 

and  communication,  and  new 
types  of  retail  stores,  190 

congestion  in  terminals,  312-13 

cost  of,  213,  305-9;  effect  on 
commission  sale  of  farm  prod- 
ucts, 81 ;  effect  on  retail 
prices,  306-7;  on  wholesale 
prices,  306-7;  and  mail  order 
houses,  229;  relation  to  prob- 
lem of  elimination  of  middle- 
men,4>291 

demurrage  charges,  310-12 

diversion  in  transit,  303-5 

factors  determining  efficiency, 
295-6 

farm  products,  32-3 

functions  of,  19-22 

handling  products  at  terminals, 
309-13 

importance  of,  in  marketing, 
293-5 

jobbers'  service  in,  139 

less-than-carload    freight,    310 

of  raw  materials,  91-3 

relation  to  market  areas,  296- 
97 

and  retailing,  190 


Transportation,       track       storage 

charges,  312 
trucking,   307-9 

Traveling  buyer,  50 

Trucking,  307-9 

cartage    costs    in    Washington, 

D.  C,  309 

caused  by  poorly  located  prod- 
uce markets,  312-3 

Trust  movement,  effect  of  price- 
cutting  on,  448 

Trusts,  relation  to  marketing,  544; 
State  control  of,  488 

Tugwell,  R.  G.,  475 

Turnover,  see  Stock-turn 

Twyford,  H.  B.,  90 

Unfair  competition,  see  Competi- 
tion, unfair 

Uniform  bill  of  lading,  319 

Unit  costs,  relation  of,  to  financ- 
ing, 329-30 

Unit  store,  the,  187-90 
and  advertising,  210 
chain  store  vs.  specialty,  232 
delivery  service,  222 

U.  S.  Chamber  of  Commerce,  205 

U.  S.  Government,  a  source  of 
market  news,  384,  386-8,  390-1, 
394-5 

U.  S.  Grain  Growers,  Incorporated, 
245,  254-5 

U.  S.  Steel  C9rporation,  107 

U.  S.  Superintendent  of  Docu- 
ments, 238 

U.  S.  Warehouse  Act,  319 

U.  S.  vs.  Colgate  and  Co.,  case  of, 
452 

U.  S.  vs.  the  U.  S.  Steel  Corpora- 
tion, case  of,  489 

Urner -Barry   Company,  387 

Vanderblue,  H.  B.,  11,  24,  201,  396, 

397    403 

Van  Rise,  C.  R.,  475,  501 
Van  Metre,  T.  W.,  298,  301 
Vegetables,    channels   of   distribu- 
tion, 60;   direct  sale  of,  45-6; 
marketing      of,     by      various 
methods,   42-3;   as  raw  mate- 
rials, 90 ;  standardization,  402-3 
Volume  of  business  and  elimina- 
tion of  middlemen,  291 


570 


INDEX 


Warehouse  receipt,  the,  318,  319 

Warehouses,  control  of,  320-22 

Warehousing,  22.  See  also  Cold 
storage 

Washington,  D.  C.,  cartage  costs 
in,  309 

Wastes  of  competition,  see  Com- 
petition, wastes  of 

Wastes  of  marketing,  499-500 
prevented   by   adequate   market 
news,  381 

Waterway  transportation  rates,  307 

Webb,  B,  542 

Webb,  S.,  542 

Webb  Act  of  1918,  the,  168,  487, 
544 

Weights  and  measures,  standard, 
404,  406 

Weld,  L.  D.  H.,  11,  17,  29,  48,  59, 
87,  130,  140,  153,  154,  158,  175, 
177,  179,  182,  275,  276,  277, 
280,  301,  308,  324,  362,  384, 
387,  398,  441,  508,  509,  543 

Wheat,  average  annual  crop  in  re- 
cent years,  374 
concentration  of,  95 
inspection  of,  95,  404 
marloting     of,     51,     423,     531; 
future  contracts,  364-6;   hedg- 
ing in  the,  368-9,  370-2 
milling  in  transit,  303-4 
physical    handling   from    grower 

to  consumer,  307-8 
receipts,    shipments,    and    local 
consumption    of,    in    ten    po- 
rn TV  markets  (Table  IV),  57 
storage  in  transit,  303-4 
world  price  for,  441-2 

Wheeler,  W.  A.,  386,  387 

Whiskey  trust,  the,  532 

White,  P.,  384 

Whitney,  N.  R.,  339 

Wholesale  cooperative  associa- 
tions of  farmers,  248-58 

Wholesale  margins  (Table  XII), 
518 


Wholesale  markets  for  farm  prod- 
ucts, see  Farm  products,  mar- 
kets, wholesale 

Wholesale  markets  for  manufac- 
tured products,  115-19 
middlemen  of  the  manufacturers' 
market,  153-68  (Chap.  IX). 
See  also  Jobber,  of  manufac- 
turers' market;  and  Func- 
tional middlemen  of  manufac- 
turers' market 

Wholesale  price,  see  Price,  whole- 
sale 

Wholesale  receiver  for  farm  prod- 
ucts, 78,  84-5;  profit  of,  84-5 

Wholesale  stock-turns  (Table 
XIII),  518 

Wholesaler,  for  farm  products,  78 
of    manufacturers'    market,    see 
Jobber  of  manufacturers'  mar- 
ket 

Wholesalers,  relation  to  consum- 
ers' cooperative  organizations, 
268 

Wholesaling,  economy  of,  117 

Williver,  J.  C,  293 

Wilson,   Woodrow,  480 

Winsted  Hosiery  Co.  vs.  Federal 
Trade  Commission,  case  of, 
528 

Wool  difficult  to  standardize,  93; 
standardization  of,  402-3 

Wool  markets,  67-8 

Wooley,  E.  M.,  209 

World  market  for  staple  commodi- 
ties, 440-3 

World  market,  transportation  and 
297 

World  War,  development  of  State 
activities  during,  474-5 

Young,  J.  T.,  475,  479,  490 

Zimmerman,  E.  W.,  166 
Zimmerman,  M.,  234 


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